Retirement Crisis?

[melveyr]

The real take away is that in our current system money is debt. Here is a little snippet from the MMT wiki (i know the libertarians here hate it but a lot of the MMT stuff is factual)...

"State money is a liability of the state that is accepted by the state in discharge of liabilities to the state (primarily taxes). In this sense, state money is a tax credit as an asset of nongovernment. Since no concomittant liability for this asset is created in nongovernment, state money is a net financial asset of nongovernment.

Commodity money is the use of a commodity as a medium of exchange, usually a commodity high in demand. Metallism designates commodity-based money that has a given quantity of a precious metal which when stamped circulates as a means of payment and medium of exchange. Often its supply is monopolized in some manner by government. Commodity money consists of coins whose value is determined by the quantity of precious metal they contain.

Fiat money is a liability of the state with no promise to convert it into anything other than itself (as in making change).

Bank money is liabilities of a private bank that are accepted as means of payment or media of exchange; this is primarily deposits on which cheques can be drawn, although in the past it consisted primarily of bank notes. Some bank money is convertible without much delay and with little loss of value to fiat money and/or commodity money. Today, conversion is always done at par with fiat money. In the past bank money often circulated without convertibility. Just as the state agrees to accept fiat money at its pay offices, banks accept bank money in payment to retire liabilities to the banking system. Since loans creates deposits, bank money nets to zero.

Credit money is money that is created by extending a creditary relationship between creditor and debtor, usually involving the debtor paying interest to the creditor who assumes risk of default. Bank money is one form of credit money, but all credit extension creates "money" in a broad sense. Since all credit money is created with corresponding assets and liabilities in nongovernment, credit money created in nongovernment nets to zero."

Here is another thing to think about... Under the gold standard gold was at the top of the pyramid. The state then issued paper that was convertible to gold at a fixed price. The banks then would issue money that was convertible into the state money. Part of the Federal Reserves and FDIC's job was to make sure that the bank money cleared at par with the state money.

The only difference today is that the state money is no longer convertible into gold. If you think of banks as currency issuers, it is not that complicated. Banks literally used to issue their own paper money, like with their own pictures on them. However, it was insanely complicated trying to set up a clearing house to make it all work. Different banks money even had different exchange rates with the other banks money because of different perceived risks of default. It was a mess. Now the government ensures that all bank money clears at par with state money but the fundamentals remain the same.

The banks don't lend state money. They create currency that is convertible into state money. There is a difference.

[notsheigetz]

The real take away is that in our current system money is debt. Here is a little snippet from the MMT wiki (i know the libertarians here hate it but a lot of the MMT stuff is factual)...

You have an interesting mind (seriously, no put down intended). You obviously don't think much of libertarianism (circle jerk?) but you advocate the investment strategy of a man who was twice the presidential candidate of the libertarian party.

I discovered HB through his political writings and I found myself saying amen to nearly everything he said on a purely moral basis (he was very much antiwar and anti-interventionist). It was only later on that I discovered his writings about investing and I do not actually recall ever reading anything about what economic philosophy he subscribed to, whether it be Austrian, Keynesian, or whatever. He struck me as purely pragmatic and, also like me, didn't give a rat's ass about the economic philosophy. I think the equation of libertarian=Austrian might not be precisely correct though I can understand why you would think so (Ron Paul endorses Austrian economics wholeheartedly).

MMT sounds good. Austrian economics sounds good. Both have nobel prize winners. I haven't gotten mine yet.  I do hope MMT works out in the long run as it seems to be the prevailing wisdom, because I am looking forward to getting my social security check.

[melveyr]

The real take away is that in our current system money is debt. Here is a little snippet from the MMT wiki (i know the libertarians here hate it but a lot of the MMT stuff is factual)...

You have an interesting mind (seriously, no put down intended). You obviously don't think much of libertarianism (circle jerk?) but you advocate the investment strategy of a man who was twice the presidential candidate of the libertarian party.

I discovered HB through his political writings and I found myself saying amen to nearly everything he said on a purely moral basis (he was very much antiwar and anti-interventionist). It was only later on that I discovered his writings about investing and I do not actually recall ever reading anything about what economic philosophy he subscribed to, whether it be Austrian, Keynesian, or whatever. He struck me as purely pragmatic and, also like me, didn't give a rat's ass about the economic philosophy. I think the equation of libertarian=Austrian might not be precisely correct though I can understand why you would think so (Ron Paul endorses Austrian economics wholeheartedly).

MMT sounds good. Austrian economics sounds good. Both have nobel prize winners. I haven't gotten mine yet.  I do hope MMT works out in the long run as it seems to be the prevailing wisdom, because I am looking forward to getting my social security check.

Yes it appears we found HB from opposite ends. I found him strictly because of my interest in investments and TBH that is where my interest in him ends. I like the PP because it works and it is grounded in simplicity. In my mind it captures the essence of diversification in a simple package, and I feel indebted to him for sharing it with the retail investor community. The PP works just as well for a liberal as it does a libertarian. I am somewhere in the middle of those two without much interest in figuring out where 

[notsheigetz]

The PP works just as well for a liberal as it does a libertarian. I am somewhere in the middle of those two without much interest in figuring out where 

Probably works just as well for a conservative too. Or even, god forbid, a neo-conservative (aka liberal).

[edsanville]

It is not nonsense.

Do a thought experiment.  Let's pretend you are the magic savings-inducing employee.  Let's say everyone who buys stuff from the place where you work decides to cut their purchases by 50% in the coming year.  They're saving!  Yay!

What will happen to your job?  To your pay?

OK, you find a new job.  But your powers are relentless, and your new company's customers decide to cut their purchases by 50%.

What then?

Oh, it most certainly is nonsense.

Growth is built upon savings, the accumulation of capital.  That is why they call it capitalism.

As long as "money" is freely created, the centrally planned economy is going to work just as well as other centrally planned economies always have.  Booms and busts are built upon ex nihilo money creation, with its accompanying misallocation of resources and debt driven consumption until people cannot borrow and spend any more.

So what are they going to do with their savings that they are no longer spending?  Bury it in their backyard?  Maybe if they were gold bugs or following the PP they might bury all or some of it.  But really, what are they going to do?

Let's say they put it in the bank.  The bank has more money to lend.  Rates fall.  A young couple just getting started can now afford to take out a loan to fix up or add onto their house, with a long earning lifetime ahead of them to pay it off.  More spending.

Or actually, maybe by saving what they are doing is paying down debt, i.e. their maxed out credit cards.  As they pay off their cards, the issues have more money to lend.  See above.  Plus, they soon have the cards paid off, and without paying 20% interest they realize they can spend at least 1/2 of what they were doing before they maxed out, without going into debt.  More spending than when they were maxed out, with less misallocated capital because their spending is conscious instead of conspicuous.

Or perhaps they put the money into the stock market, providing needed capital for businesses to expand into south america and asia.  Your business, in fact.  They give you a chance to take a promotion to head the new Asian office on a 2 year assignment in Singapore, with housing provided in addition, of course.

Loans do not require deposits.  See http://pragcap.com/banks-are-not-mystical.

Actually, BANKS create money.  In fact, banks create far more money than the government deficit spending does.

You Austrians are a hoot.  Does the Sun still orbit the Earth by your reckoning?

Hasn't everyone here watched "Money as Debt" yet?
http://www.youtube.com/watch?v=0K5_JE_gOys

[MachineGhost]

I am somewhere in the middle of those two without much interest in figuring out where 

Give it time, you are young yet!   The young are too self-absorbed to care much about politics and society (although those holy do-gooders in high school and college will always be bizarre abominations...  probably politicians in training).

[AgAuMoney]

Actually, BANKS create money.  In fact, banks create far more money than the government deficit spending does.

You Austrians are a hoot.  Does the Sun still orbit the Earth by your reckoning?

Maybe if you actually learned to read more than one idea at a time you might actually be able to post something coherent.

Like read where I said, "in the broken system we have now".

Banks creating money is PRECISELY the problem with the current system.

[AgAuMoney]

If I sell goods and/or services for 10 ounces of gold and consume only 9 ounces worth, then I have a choice about what to do with the additional ounce I have left over:

1. Put it in a safe place for use later;
2. Lend it to someone else, with the intention of getting back more later when the borrower has produced or saved enough to pay me back.

Neither of these requires inventing "money" out of thin air, and there is no "paradox of thrift" involved.

Anyone who doesn't understand this should read Man, Economy, and State by Murray Rothbard immediately.

(There is a problem if the rate of interest is higher than the rate at which the lenders consume the interest, because then there is no way for aggregate lending to be repaid, but this is not a "paradox of thrift".)

Which country do you live in and in what year? 

So you think the current situation is fine and have not the slightest interest in removing the fraud that is causing problems with banks regularly in the news?

[melveyr]

If I sell goods and/or services for 10 ounces of gold and consume only 9 ounces worth, then I have a choice about what to do with the additional ounce I have left over:

1. Put it in a safe place for use later;
2. Lend it to someone else, with the intention of getting back more later when the borrower has produced or saved enough to pay me back.

Neither of these requires inventing "money" out of thin air, and there is no "paradox of thrift" involved.

Anyone who doesn't understand this should read Man, Economy, and State by Murray Rothbard immediately.

(There is a problem if the rate of interest is higher than the rate at which the lenders consume the interest, because then there is no way for aggregate lending to be repaid, but this is not a "paradox of thrift".)

Which country do you live in and in what year? 

So you think the current situation is fine and have not the slightest interest in removing the fraud that is causing problems with banks regularly in the news?

I have never endorsed the current system.

There is this really weird phenomenon on this board where some posters flip between trying to describe the monetary how it is and how they want it, without clarifying. So to make it perfectly clear all of my posts about the monetary system have been, and will be, about how the monetary system currently operates, not about some theoretical system that I would want. What I want is irrelevant and I am not smart enough to know what monetary system would be best. I care about understanding the current system so that I can construct an investment portfolio that will be robust. That's basically it.

[doodle]

People should take the time to watch Byron Dale on youtube. He does a pretty good job of clarifying how the debt as money banking system works and its pitfalls. Where I get confused with a lot of the austrian economists and sympathizers is that they seem so fixated on government debt which isnt the real problem. The problem lies in the private sector.

[AgAuMoney]

There is this really weird phenomenon on this board where some posters flip between trying to describe the monetary how it is and how they want it, without clarifying. All of my posts about the monetary system have been, and will be, about how the monetary system currently operates,

This type of problem is common on essentially every board.

In this case, it seemed pretty clear that this tangent started with a "how it should be" which was then attacked by the accusation of causing a "paradox of thrift."  And since none of that was talking about "now" but rather "should be" it seems extremely odd that the explanation for how thrift would not be a problem would in turn be attacked with an explanation of how the current banking system works, especially in light of that behavior causing the exact problem the original "how it should be" was trying to fix.

[melveyr]

There is this really weird phenomenon on this board where some posters flip between trying to describe the monetary how it is and how they want it, without clarifying. All of my posts about the monetary system have been, and will be, about how the monetary system currently operates,

This type of problem is common on essentially every board.

In this case, it seemed pretty clear that this tangent started with a "how it should be" which was then attacked by the accusation of causing a "paradox of thrift."  And since none of that was talking about "now" but rather "should be" it seems extremely odd that the explanation for how thrift would not be a problem would in turn be attacked with an explanation of how the current banking system works, especially in light of that behavior causing the exact problem the original "how it should be" was trying to fix.

Yeah I guess it's kind of hard to track the winding road that brought us to banking.

However, I think once one sees that banks issue a convertible currency (bank liabilities that we hold as an asset) that are convertible into state money at par because of FDIC and the Fed, the world starts making a lot more sense. Bank money is just like any other convertible currency.

[moda0306]

In any monetary system, public or private, the paradox of thrift exists... It's going to be part of any scenario where credit exists. 

But melveyr is my f'kin hero cuz his age-adjusted rate-of-wisdom is the greatest thing I've seen.

[AgAuMoney]

In any monetary system, public or private, the paradox of thrift exists... It's going to be part of any scenario where credit exists.

Only if "credit" implies the fraudulent creation of money out of nothing.

That is the origin of the "paradox" after all.

If "credit" is someone that has money (was/is thrifty) lending it (extending credit) to someone who needs it, there is no paradox of thrift.

In fact, just the opposite.  Such is how capitalism worked in america for most of the 19th century, bringing us from a backwater nobody to a world power and amazing the other world powers of the day.

[melveyr]

In any monetary system, public or private, the paradox of thrift exists... It's going to be part of any scenario where credit exists.

Only if "credit" implies the fraudulent creation of money out of nothing.

That is the origin of the "paradox" after all.

If "credit" is someone that has money (was/is thrifty) lending it (extending credit) to someone who needs it, there is no paradox of thrift.

In fact, just the opposite.  Such is how capitalism worked in america for most of the 19th century, bringing us from a backwater nobody to a world power and amazing the other world powers of the day.

Well, banks still created money back then too. Which was the whole point of my previous posts. It was even more explicit that they were creating money back then.
http://www.journalofantiques.com/June04/coinsjune04.htm

They just didn't have the government backstopping the convertibility process like they have today, but the mechanics of credit creation/contraction were very similar.

You might be fondly looking back to a time period that has never existed 

[MachineGhost]

In any monetary system, public or private, the paradox of thrift exists... It's going to be part of any scenario where credit exists.

Although I didn't demolish it on principal grounds, this is a good read to see what non-MR aware economists have to say against it: https://en.wikipedia.org/wiki/Paradox_o ... Criticisms

But do keep into mind it is the principal plank of Keynesiansm.  Without the econometric fallacy that investment is fixed, government deficit spending probably could not be justified and that flies against the activist statist agenda of Progressives.  You're not likely to find a truly objective economist that doesn't kowtow to his political leanings.

But melveyr is my f'kin hero cuz his age-adjusted rate-of-wisdom is the greatest thing I've seen.

You two need to get a room already!

[doodle]

What Im hung up on is how interest affects the monetary system. It seems that as soon as interest is introduced the money supply must be growing or else there isnt enough to cover principle and interest on loans. In addition if the money supply isnt growing while investment is taking place that results in increased productivity then we would have deflation.

As far as I can tell there are only two ways to create money and they either involve more public sector debt or more private sector debt....

[MachineGhost]

I think the real problem boils down to credit not being guaranteed to be created on demand for real investment purposes, especially if the banks decide their priority is their need to repair their own balance sheets.  So their problems hobble the economy entire...  it's very fascist.  I wish I could say we need separation between money and state, but in this case its a private credit monopoly that needs to be broken.

There is no good answer short of a wholesale restructuring of our money system away from central planning and debt.  We need something like BitCoins On Demand (TM).

What gets me about the current system is how bizarrely ethereal it all is.  All we see is electrons on a screen or ink on paper.  The numbers can simply disappear for whatever reason and you have no proof it ever existed or figure out how to get it back.  You have no proof any of the scribbles is real, short of you converting those electrons into something tangible.  The whole system relies ultimately upon trust and confidence in our fellow human beings not to be dishonest thieves.  I just don't know if that is the height of lunacy or a day of reckoning waiting to happen.

[AgAuMoney]

What Im hung up on is how interest affects the monetary system. It seems that as soon as interest is introduced the money supply must be growing or else there isnt enough to cover principle and interest on loans.

That is essentially correct.  In practice a static or slowly growing money supply is likely to be OK, because the cost of debt (i.e. interest) would be high and so discourage debt.  Then interest could be paid as long as it was small relative to the money supply and it would be as long as debt required money to lend.  This allows payment to be made and forecast as a simple "I make $X/yr, I will owe $Y/yr and Y<(X+safety), all should be OK.

Historically we have never had a naturally static or deflationary money supply.  Even pegging money to gold and/or silver sees a slowly (usually, but sometimes more quickly) increasing money supply, never significantly shrinking.  The big problems occurred during or shortly after the rare natural increases in money supply (fast then slowing growth), but more frequently were artificially induced as gov't money creation stopped or banks practicing fractional reserve lending were suddenly unable to extend credit any further and the slowing or contracting credit causes deflation.

A deflationary money supply (e.g. bitcoins) is a real problem for debt service.  Such a problem that even tho there is at least one source seeking to borrow bitcoins and pay interest, I'm skeptical it can work.  Deflation, especially if unforeseen and unsignaled by market interest rates (e.g. when it is sudden or when the vast majority of people are unfamiliar with the problem it causes) is a harsh teacher.

Deflation is the largest problem for debt service, and historically it was preceded by creating money out of nothing which suppresses interest rates (negating that market signal) and encourages borrowing.  Then a sudden elimination or slowing of that debt creation relative to the growth in economic activity spurred by the previous practice causes deflation.  The change being as artificial as the previous inflation is unexpected and lacks market signals thus hilarity ensues.