Jim Cramer recommends gold

[moda0306]

I'll admit one of the toughest parts to swallow regarding MMT is their descriptions of private-sector savings & investments and their referring to "financial assets."  I don't think this is as malicious as LW does, though.  I think it's just me having some terminology difficulties in interpreting exactly what they're saying.

One thing they do a GREAT job of focusing on though, in my opinion, is the ability for government spending to be 1) sustainable, since we can never default unless we want to, and 2) at least beneficial to private-sector balance-sheets... especially domestic ones when our populace is overindebted and the foreign populace holds a lot of cash.  They highlight extremely well that you can't take a dollar out of the domestic economy and expect domestic balance sheets to improve.  That fact alone highlights something important to me... that it's probably not federal debt that caused our massive consumer debt.  In fact, to talk about the two as even similar may be completely missing the boat.  One is fundamentally different from the other for more than one reason... as far as I can see it, anyway, but they get discussed like they are the same thing and that one causes the other.

Austrianism starts with the assertion that any monetary system outside the gold standard is inherantly evil (ok, I'm exaggerating, but not that much), so it seems to skip over the nuances of how a fiat currency operates to the conclusion that it's unsustainable on its face because it has too little respect for the invisible hand and private property.  I think they have some great things to add to the debate, but definitely no more than the MMT folks or Keynesians.

[Lone Wolf]

From your comments, and statements, it doesn't seem like you've spent much time learning about it.

It's more than okay to call me out on something specific that I've gotten wrong.  I'm not seeing yet what that would be.

I have to say, the time that I did spend on it was fairly unrewarding.  The redefinition of common terms was a big irritant as was the two-faced usage of the example of Greece.  On the one hand, Greece was not an appropriate example to use for why you should live within your means (since they don't control their own currency.)  On the other hand, MMT was happy to use Greece as an example of the negative impact of austerity measures.

It felt like a very high "sophistry to actual, interesting content" ratio when stacked up against the economics readings that I'm used to.  You didn't feel that way?

The reasoning for these definitions, from what I understand, is to show that the end result is that the national debt level is the same as the money savings in the non government sector, not the total monetary value of all assets used as saving.

Only if you count any money created by the Federal Reserve as part of the "national debt" (something nobody but MMTers does.)  Given this, I've still not seen a straightforward answer for why this is interesting.

It's frequently used as an argument for why we must run a budget deficit to support private savings.  But MMT is actually saying no such thing (to its credit, I must add, because otherwise it would be wrong.) 

MMT is nothing more than a description of modern fiat currency system. That's all there is to it. Once you understand it, you begin to see how fiat money works in our country. Anyway, I respect your concerns, and I share them. Why not delve deeper into it with me?

If I had to bottom-line our difference on this, it'd simply be that I haven't yet seen an observation from MMT that wasn't either a) something already established more clearly by the monetarists or b) a disappointing tautology once you unpacked it with MMT-specific definitions.  I'm a romantic at heart, though, so perhaps MMT has some trick up its sleeve to sweep me off my feet. 

I have a lot of "What would MMT have done in <time period X>?" questions.  The bummer, though, is that anything pre-1971 or anything in a country under the Euro is off-limits.  So we're kinda short on empirical data.  Given that, I'd want the theory to really wow me.

Now I'm definitely sure that you haven't read enough about MMT. Those are all gross mischaracterizations and inaccurate representations of MMT.

For one, MMT believes taxes are seen as monetary tool:

Where's the mischaracterization?  MMT acknowledges that inflation is a monetary phenomenon.  The government creates the currency and taxes are used to "remove" the currency.

If inflation is running high, wouldn't you need to bring MMT's arsenal of monetary tools (such as taxation) to bear?  As it says in the link you provided: "If they spend too much and tax too little they can create mal-investment and inflation."  What do you suppose MMT would do in the midst of double digit inflation?

If inflation isn't a fear, why tax at all?  There's a reason that taxes are included in the MMT worldview.

[moda0306]

On the one hand, Greece was not an appropriate example to use for why you should live within your means (since they don't control their own currency.)  On the other hand, MMT was happy to use Greece as an example of the negative impact of austerity measures.

I will say some of their terminology is a bit confusing when trying to fit it into what we believe it to be, but their observations of Greece are spot-on.  Plenty of countries around the world have high debt and deficits but are doing just fine as far as interest rates.  Plenty of other countries have socialized medicine and other entitlements far beyond ours and their debt is selling for cheap.

I think Ireland is a better example to us as a test to our conservative assumptions, because it was one of the most conservative countries in Europe.  It had super low taxes, balanced budgets, low debt, etc.  Ireland was repeatedly touted as the poster-child for conservative-based prosperity, and now look at it.

If there's anything to learn from MMT, it's the observation of non-sovereign vs sovereign fiat currencies over the last few years.  Whether debt-levels were high or low pre-2008 seems to have little bearing on the success of currencies at this point.

[Gumby]

From your comments, and statements, it doesn't seem like you've spent much time learning about it.

It's more than okay to call me out on something specific that I've gotten wrong.  I'm not seeing yet what that would be.

I have to say, the time that I did spend on it was fairly unrewarding.  The redefinition of common terms was a big irritant as was the two-faced usage of the example of Greece.  On the one hand, Greece was not an appropriate example to use for why you should live within your means (since they don't control their own currency.)  On the other hand, MMT was happy to use Greece as an example of the negative impact of austerity measures.

It's not fair game to suggest that taking money out of the system (whether through surpluses or austerity) will leave the citizens with less money to go around? How does an economy grow when there's less money in the system?

It felt like a very high "sophistry to actual, interesting content" ratio when stacked up against the economics readings that I'm used to.  You didn't feel that way?

Yes, absolutely, at first. Then I gave it another look. You didn't think the PP was preposterous upon first glance?

The reasoning for these definitions, from what I understand, is to show that the end result is that the national debt level is the same as the money savings in the non government sector, not the total monetary value of all assets used as saving.

Only if you count any money created by the Federal Reserve as part of the "national debt" (something nobody but MMTers does.)  Given this, I've still not seen a straightforward answer for why this is interesting.

I'm not sure I follow. You don't see a pattern in this chart?

If I had to bottom-line our difference on this, it'd simply be that I haven't yet seen an observation from MMT that wasn't either a) something already established more clearly by the monetarists or b) a disappointing tautology once you unpacked it with MMT-specific definitions.  I'm a romantic at heart, though, so perhaps MMT has some trick up its sleeve to sweep me off my feet.  :)

That's fair. I think for me it helps explain Japan...and how our Treasury Bonds will never default (unless we want them to), how our deficit can seem astronomical, and how we can still target inflation at the 2% rate that the CBO is projecting. If nothing else, it explains how we aren't already seeing bond yields at 12% here in this country.

I have a lot of "What would MMT have done in <time period X>?" questions.  The bummer, though, is that anything pre-1971 or anything in a country under the Euro is off-limits.  So we're kinda short on empirical data.  Given that, I'd want the theory to really wow me.

I think it's fascinating that people came up with this in the 40s when the world was still pegged to Gold.

If inflation is running high, wouldn't you need to bring MMT's arsenal of monetary tools (such as taxation) to bear?  As it says in the link you provided: "If they spend too much and tax too little they can create mal-investment and inflation."  What do you suppose MMT would do in the midst of double digit inflation?

I'm pretty sure MMT doesn't have all of the answers to our problems. It mostly describes how a fiat monetary system can work if managed properly. Of course, inflation implies too much money in the system. So, higher taxes would certainly be a weapon against that. I'm still learning about it. I'll let you know what I find (if anything).

If inflation isn't a fear, why tax at all?  There's a reason that taxes are included in the MMT worldview.

Taxation is necessary to legitimize the currency. However you're wrong about inflation not being a fear. Inflation is one of MMT's biggest fears. If you had read that document, you would have known that!

[melveyr]

Taxes create a demand for money. Without an underlying demand, the currency would simply be a faith driven bubble that surely would have popped by now. That is the entire underpinning of fiat currencies. Please read about the tally sticks of England.

http://coburns.biz/index.php/2009/01/02 ... z1T9acnjvv

To understand MMT, you have to drop all ideologies. You have to suspend all ideas of what system we "should" have. I see that MMT accurately describes the systems that we currently operate under. That does not mean I condone our fiat currency, it just means that I feel that MMT most accurately describes it.

A fiat government has infinite reserves.

This means that a fiat government does not need taxes to spend. Any tax "revenue" simply gets added to their infinite reserves. It effectively vanishes because any number added to infinity, still gives infinite reserves. The same can be said of spending. Any money spent is subtracted from infinity, leaving the government with infinite reserves.

That is how government spending and taxation has no effect on the governments fiscal position.

Do you agree that a fiat government has infinite reserves?

I think whether or not this is agreeable is the best place to launch further discourse.

[Lone Wolf]

If inflation isn't a fear, why tax at all?  There's a reason that taxes are included in the MMT worldview.

However you're wrong about inflation not being a fear. Inflation is one of MMT's biggest fears. If you had read that document, you would have known that!

Didn't read it?  I quoted directly from the link your provided.  I'll repost: "If they spend too much and tax too little they can create mal-investment and inflation."

The question was rhetorical.  The point I'm making is that once you're facing inflation, you can't just keep printing up more and more money.  What tool would MMT offer to fight inflation (since they acknowledge that you want to keep the printing down when inflation takes off?)  It sounds to me like the ultimately the taxpayer will have to foot the bill when the printing presses take a break.

Thus, debt should matter a great deal, even if it doesn't matter immediately.

Taxation is necessary to legitimize the currency.

You don't need taxation for that (although certainly it doesn't hurt.)  Legal tender laws are what legitimize the currency.

What matters is what debts are denominated in.  Taxes are just a special case of debt (IMO).

Apart from that, demand for some form of money will always exist.  Legal tender laws and taxation just make sure it's the government's money that wins the day.

[Gumby]

The question was rhetorical.  The point I'm making is that once you're facing inflation, you can't just keep printing up more and more money.  What tool would MMT offer to fight inflation (since they acknowledge that you want to keep the printing down when inflation takes off?)  It sounds to me like the ultimately the taxpayer will have to foot the bill when the printing presses take a break.

I believe taxes would have to go up in order to drain the money supply. Perhaps Melveyr or Moda can shed some some light on the remedies in a fiat world.

Taxation is necessary to legitimize the currency.

You don't need taxation for that (although certainly it doesn't hurt.)  Legal tender laws are what legitimize the currency.

What matters is what debts are denominated in.  Taxes are just a special case of debt (IMO).

Apart from that, demand for some form of money will always exist.  Legal tender laws and taxation just make sure it's the government's money that wins the day.

I'm not entirely familiar with Legal Tender Laws, but is there a threat of prison if you pay a debt in another currency? I think Legal Tender Laws only make the paper a legal form of exchange. But, those laws don't give the currency have any value. It seems to me that taxation is the only thing that actually provides a punishment for not using a currency — and that adds some real value to it.

Thus, debt should matter a great deal, even if it doesn't matter immediately.

Perhaps it's best if you answer Melveyr's question before we continue any further. An open mind — much in the way needed to see the validity of the PP — will also be helpful

[MediumTex]

Do you agree that a fiat government has infinite reserves?

I think whether or not this is agreeable is the best place to launch further discourse.

This is a bit like discussing whether or not a human being is immortal.

If you accept that immortality is simply a belief that cannot be proven or disproven in the present since it postulates the nature of something (i.e., the future composition of a current person) that cannot be known beforehand, then all you can say about immortality for sure is that the only operational relevance it has (or may have) is the effect it has on the present tense experience of life that a person may be having.  Another way of saying this is that the anticipation of eternal life that a belief in immortality represents may not really be a peek into the nature of one's future existence, but rather just another way of experiencing the present based upon a mental simulation of what the future might be like.

In other words, the benefit of a belief in immortality may not be an actual everlasting existence, but rather a slightly delusional way of looking at the current world that provides a sense of meaning and wholeness and a mechanism for remaining calm in the face of uncertainty.  The concept of death strikes fear in most people, and fear can have a debilitating effect on one's rationality.  Thus, as delusional as a belief in immortality may be in theory, it could have an operational function that is actually quite beneficial and even rational.

To tie this back to fiat currencies, what if this notion of infinite reserves is sort of the monetary equivalent of an individual's belief in immortality?  Deep down, we all know that no currency reserve is really inifinite, in part because the life expectancy of the political entity that creates all fiat currencies is typically about that of a fruit fly when one looks at the larger arc of recorded history.

Even if it is based upon questionable assumptions, however, perhaps it is still best for the stability of a political/economic system to adopt certain beliefs that an anthropologist might call "folkways", which would be the broad category of factually inaccurate but culturally beneficial beliefs that help to hold a society together and legitimize political entities.  So we say that a temporary currency arrangement in the form of a fiat system has "infinite reserves."  What does that mean if we know that what we are calling "infinite" is almost certain to be quite finite in practice?  Is it like the eternal love that people profess for one another?  Is such love really eternal, or is it based upon the longer of the two life expectancies of the lovers?  Are we calling something infinite not because it is actually infinite, but because it is necessary to call it that to create the illusion that the entire arrangement is not bounded by any limitations?  That's what I would be inclined to say.

Within the carefully cultivated set of delusions on which a fiat currency system is premised, I suppose that one could say something is "infinite", as in "infinite reserves", but perhaps the only real bit of infinity we are dealing with in these cases is mankind's generally infinite capacity for self-delusion.

Maybe the reality is more along the lines of an all-you-can-eat buffet where you make two trips through the line and the manager stops you and says "that's all you can eat."  In a fiat monetary system, maybe gold is the restaurant manager who at some point tells the market what "infinite reserves" really are.

[Gumby]

To tie this back to fiat currencies, what if this notion of infinite reserves is sort of the monetary equivalent of an individual's belief in immortality?  Deep down, we all know that no currency reserve is really inifinite, in part because the life expectancy of the political entity that creates all fiat currencies is typically about that of a fruit fly when one looks at the larger arc of recorded history.

I think that's a very good point — and why this is so difficult to comprehend. The human mind is really incapable of perceiving infinity. The universe may be infinitely large, but we'll never know if it is or isn't. However, that doesn't stop us from trying to learn about our universe — even if the research is theoretical.

[melveyr]

Thats an excellent point MT. I still think it fits within the confines of MMT in a sense, but I like the distinction. I will be more careful with my wording from now on.

MMT first starts with the imposed tax liability. The entity issuing the currency must have the means to enforce its demands on the people. The ability of the government to tax is a necessary condition for the reserves to be infinite. Otherwise, the reserves have no meaning and effectively vanish.

But, it is important to note that the government does not need to dissolved because of liabilities in its own currency. Other factors can certainly topple a fiat government though, as you point out.

[moda0306]

I'd say that the "solution" to inflation is lower deficits whether by higher taxes or less spending is what would quell inflation in a mock-MMT world.

Regarding MT's great post, I guess I'd say that the permanence of a currency (ie, government) probably has a lot less to do with whether they have a hard currency, peg currency, or sovereign fiat currency than the natural ins and outs of world/government stability.

Ideally, of course, if your government collapses it'd be nice to have a stash of gold vs a stash of green paper, but I think with any modern society it'd be realistic to assume much gold would be held on-person... and even so, you can accomplish that today.

I guess I see government collapse being a separate issue from currency collapse.  I think MT's point is huge in regards to personal investing, but I wonder if gold prevents governmental collapse at all.

[MediumTex]

Ideally, of course, if your government collapses it'd be nice to have a stash of gold vs a stash of green paper, but I think with any modern society it'd be realistic to assume much gold would be held on-person... and even so, you can accomplish that today.

I guess I see government collapse being a separate issue from currency collapse.  I think MT's point is huge in regards to personal investing, but I wonder if gold prevents governmental collapse at all.

In modern times, it is not uncommon to see relatively orderly collapses of governments.  Examples that come to mind are the Soviet Union in the late 1980s and Egypt earlier this year.

As far as whether gold helps to prevent a collapse of a government, I think that a government would be expected to abandon a gold standard as a way to maintain power when things began to fall apart so that when the end finally came the monetary system would have been long hollowed out.  I think this was the pattern with ancient Rome as well as Germany leading up to and following World War I.  Future historians may observe that it happened for the United States starting in 1971.

[stone]

Lone Wolf, I understand your points about an asset tax being morally objectionable and casting savers as villains. Remember I'm also a net saver and incidently I'm also no fan of unnecessary consumption. I'm not advocating an increase in the overall tax level. Having an asset tax INSTEAD of capital gains tax, corporation tax, payroll tax, sales tax, income tax etc etc would mean that you would have more money left to save whilst you were saving and could get more for your savings when you or your family came to draw them down. Without firms paying corporation and payroll taxes, earnings would be much higher and stocks would perform much better. Without the tax on dividends, stocks would use dividends to distribute earnings rather than share buybacks. Dividends return earnings to all stock owners. Buybacks are only captured by adept traders. I think the consequences of our current zoo of taxes are actually very far reaching and complex and damaging.
The MMTers say that deficits are needed because deficits allow economy wide net saving without that net saving leading to unsold inventory and unemployment. I'm just saying that as one generation is saving, the previous (and/or younger) one needs to be matching that with drawing down savings. In other words net saving should only be on the individual rather than the economy wide scale. It seems to me a different world to say that it is right and proper for people to be able to save to ensure a secure future (as I do) and to say that we need to facilitate a dynastic asset grab where a handful of families own everything and extract rent from everyone else for perpetuity.

[stone]

Melvin R "Do you agree that a fiat government has infinite reserves?"

The other side of the coin to this proposition is "Do you agree that the economy could cope with the private sector having infinite wealth?"

From me the answer is a resounding no.

MMTers always bang on about government debt being private sector wealth. They say that Japan having 2xGDP as government debt simply means that Japan has 2xGDP as savings (because they don't have a trade deficit). The problem is that that money searches for a return and blows destructive bubbles in the process. That is what makes increasing government debt unsustainable IMHO. Remember the world only has so many people and so much natural resource. Increasing the financial claims over that finite resource of labor and nature in an exponential way is not just a case of paper accounting that can be ignored. To my mind anything exponential is unsustainable. Didn't Einstein say "the strongest force is compound interest".

[Gumby]

Didn't Einstein say "the strongest force is compound interest".

In his essay, The World As I See It, Einstein also said...

"The gold standard has, in my opinion, the serious disadvantage that a shortage in the supply of gold automatically leads to a contraction of credit and also of the amount of currency in circulation, to which contraction prices and wages cannot adjust themselves sufficiently quickly."

(Though, it's worth nothing that he wasn't advocating for fiat either)

[AdamA]

Didn't Einstein say "the strongest force is compound interest".

In his essay, The World As I See It, Einstein also said...

"The gold standard has, in my opinion, the serious disadvantage that a shortage in the supply of gold automatically leads to a contraction of credit and also of the amount of currency in circulation, to which contraction prices and wages cannot adjust themselves sufficiently quickly."

(Though, it's worth nothing that he wasn't advocating for fiat either)

Einstein died broke. 

[Gumby]

Einstein died broke.

Ummm.... That's totally false. Why would you make something like that up?

Einstein eventually settled in New Jersey, wrote his will in 1950, and died in 1955. Though he was quite famous and financially well off at the time of his death, Einstein’s estate was worth nowhere near what it is worth today. In his will, Einstein left financial and tangible property he owned at the time to his children and grandchildren, such as some personal letters and his violin. The bulk of his estate, however, was left to Hebrew University of Jerusalem. This portion of the estate consisted of the literary rights to his work, over 75,000 letters, academic papers, and manuscripts, and other items he believed at the time of his death had scientific and academic value. As to why he did not leave this portion of his estate to his family, Einstein wrote “one cannot expect one’s children to inherit a mind”?.

Source: http://alexbajwa.com/even-an-einstein-c ... ate-issues

[melveyr]

Melvin R "Do you agree that a fiat government has infinite reserves?"

The other side of the coin to this proposition is "Do you agree that the economy could cope with the private sector having infinite wealth?"

From me the answer is a resounding no.

I don't know if the private sector can handle a flood of money. I am not arguing for what should or should not happen. I am just trying to explain that the government has the power to flood the economy with as much money as they like, as long as they remain in power and can impose their currency/laws tax liabilities. If we can agree on these assumptions, then MMT's description is a logical discourse.

I'm sure there are times where the economy would do better with more money, and times where it would do better with less money. I doubt I would know what to do if I had to choose policies. I also doubt that Bernanke and congress know what is best either.

I really have been trying to steer the discussion away from how our system "should" work, and focus on how it does work. There is a big distinction.

[AdamA]

Einstein died broke.

Ummm.... That's totally false. Why would you make something like that up?

Sorry.  Didn't do it on purpose.  Thought it was true!

[doodle]

Problem with MMT is it relies on a government to give value to a currency. History says most governments, countries etc. fall apart eventually. That "eventually" might happen during your lifetime. Then..what happens?

All the Glen Beck rightwingers who rail against an international currency fail to see that gold is actually an international currency. Somewhat interesting hypocrisy.

With regards to Einstein:

The gold standard has, in my opinion, the serious disadvantage that a shortage in the supply of gold automatically leads to a contraction of credit

That contraction of credit is what keeps crazy debt fueled cheap money bubbles from forming and creating the mess that we have today. That contraction of credit is in my mind and argument "for" the gold standard, not against it. With a limited supply of credit, money has value and will flow to the most productive investments. Today we have malinvestment everywhere because money has been so cheap for so long.

[Gumby]

Problem with MMT is it relies on a government to give value to a currency. History says most governments, countries etc. fall apart eventually. That "eventually" might happen during your lifetime. Then..what happens?

I think you expect MMT to provide solutions to our world. It doesn't. MMT merely explains the framework within which the currency unit is used, maintained, created and destroyed. If the government using the currency unit is corrupt, stupid and misguided the system will fail. That is not a failing of MMT. It is a failing of the government. It is up to you to vote and choose that government.

With regards to Einstein:

The gold standard has, in my opinion, the serious disadvantage that a shortage in the supply of gold automatically leads to a contraction of credit

That contraction of credit is what keeps crazy debt fueled cheap money bubbles from forming and creating the mess that we have today. That contraction of credit is in my mind and argument "for" the gold standard, not against it. With a limited supply of credit, money has value and will flow to the most productive investments. Today we have malinvestment everywhere because money has been so cheap for so long.

He was merely pointing out that it sucks to be a country that doesn't have the means to acquire any gold. Einstein suggested pegging a country's currency to a basket of commodities instead — which was a common idea at the time.

[smurff]

Einstein died broke.

Ummm.... That's totally false. Why would you make something like that up?

Einstein eventually settled in New Jersey, wrote his will in 1950, and died in 1955. Though he was quite famous and financially well off at the time of his death, Einstein’s estate was worth nowhere near what it is worth today. In his will, Einstein left financial and tangible property he owned at the time to his children and grandchildren, such as some personal letters and his violin. The bulk of his estate, however, was left to Hebrew University of Jerusalem. This portion of the estate consisted of the literary rights to his work, over 75,000 letters, academic papers, and manuscripts, and other items he believed at the time of his death had scientific and academic value. As to why he did not leave this portion of his estate to his family, Einstein wrote “one cannot expect one’s children to inherit a mind”?.

Source: http://alexbajwa.com/even-an-einstein-c ... ate-issues

Thanks for that citation, Gumby!

[stone]

Melvin R, "I really have been trying to steer the discussion away from how our system "should" work, and focus on how it does work. There is a big distinction."

I think it is crucial to bear in mind that it might be a bit of a stretch to say that our system "does work". I'd rather say "what is going on".  Our system is pushing into fresh uncharted territory and making things up as it goes along. We have exponentially growing mountain of government-debt/private-wealth (predominantly held by an ever more select few). As the system evolves, people come up with ever more ingenious and destructive ways to tap into the distortions it creates. To try and keep the system on track despite the derailing effects of the system itself, the system gets modified. The modifications made are open to political lobbying etc etc.