How many people agree with MR/MT theory described on the forum

[edsanville]

I buy that it mostly describes reality, but I disagree that taxation is what gives a fiat currency value.  Which option do I choose for that?

What do you think gives it value?  I mean other than our massively productive economy around it.

I'm not entirely sure, but I'd say it's a combination of legal tender laws, convenience, scarcity, and the self-perpetuating fact that it's the standard that people are currently exchanging amongst themselves...

[moda0306]

I buy that it mostly describes reality, but I disagree that taxation is what gives a fiat currency value.  Which option do I choose for that?

What do you think gives it value?  I mean other than our massively productive economy around it.

I'm not entirely sure, but I'd say it's a combination of legal tender laws, convenience, scarcity, and the self-perpetuating fact that it's the standard that people are currently exchanging amongst themselves...

Hey man I agree in a lot of ways.

Legal tender laws help.

This element of scarcity helps.

Convenience helps.

But until I heard Warren Mosler described his business card hold up (holding the people in the room he's in hostage unless they can supply him with one of his own business cards, gives those cards value), I really felt lost as to what actually clinched it.  I think the real clincher is taxes.  It's the only one that makes a damn bit of any motivational value sense.

We could all look at each other and have a big "a ha" moment with our currency and it collapses in a day... unless we all believe the government is going to put us in jail for not supplying them with some by the end of the year.  It's the negative value they put on NOT having it that helps give POSITIVE value on having it.

[whatchamacallit]

I agree that Monetary Realism is a description and not a theory. It is not there to accomplish anything, just describe what is happening.


Here are some examples of descriptions and theories (things we have seen happen and things we haven't seen happen):

Descriptions:
http://en.wikipedia.org/wiki/Water_cycle
http://en.wikipedia.org/wiki/Burning

Theories:
http://en.wikipedia.org/wiki/Petroleum#Formation
http://en.wikipedia.org/wiki/Evolution

[edsanville]

What do you think gives it value?  I mean other than our massively productive economy around it.

I'm not entirely sure, but I'd say it's a combination of legal tender laws, convenience, scarcity, and the self-perpetuating fact that it's the standard that people are currently exchanging amongst themselves...

Hey man I agree in a lot of ways.

Legal tender laws help.

This element of scarcity helps.

Convenience helps.

But until I heard Warren Mosler described his business card hold up (holding the people in the room he's in hostage unless they can supply him with one of his own business cards, gives those cards value), I really felt lost as to what actually clinched it.  I think the real clincher is taxes.  It's the only one that makes a damn bit of any motivational value sense.

We could all look at each other and have a big "a ha" moment with our currency and it collapses in a day... unless we all believe the government is going to put us in jail for not supplying them with some by the end of the year.  It's the negative value they put on NOT having it that helps give POSITIVE value on having it.

I understand that point of view, but I just don't think that taxation is the main reason fiat currency has value.

To clarify what I mean:  I don't believe taxation affects currency value, outside of how it affects the money supply.

If the United States stopped collecting taxes tomorrow and paid for everything by purchasing its own debt, I believe the US dollar would still have value and still be traded in the marketplace.

Do you agree with that statement, or do you believe that the dollar would be worthless in such a scenario?

[Gumby]

Actually, I believe edsanville is correct. That's what MR says too!

http://pragcap.com/the-ft-does-mmr-on-currency-demand

We choose how our govt exists. And we use the govt as a form of partnership to better our collective living standards. We choose to mobilize resources from pvt to public domain because we view this as an efficient form of resource utilization that will help improve living standards. But it is not the tax that gives the money its true value or demand. It is the efficient and accepted mobilization of these resources that gives the money value and helps maintain its demand.  Therefore, it’s best to think of taxes as being secondary in the hierarchy of money demand.

Source: http://pragcap.com/the-ft-does-mmr-on-currency-demand

In other words, edsanville agrees 100% with the MR view. The rest of us have been using Mosler's explanation, while MR evolved to recognize that the private sector chooses to use dollars for reasons beyond taxation.

Edsanville is more of an MR-ist than we are. And that means now he has to change his vote!

EDIT: And MR's take on the true value of fiat money (absent of taxes) is further explained here:

http://pragcap.com/thoughts-on-the-value-of-fiat-money
http://pragcap.com/understanding-the-mo ... em-part-2b

[Gumby]

What do you think gives it value?  I mean other than our massively productive economy around it.

I'm not entirely sure, but I'd say it's a combination of legal tender laws, convenience, scarcity, and the self-perpetuating fact that it's the standard that people are currently exchanging amongst themselves...

I'm on board with this.

That's pretty much the standard MR interpretation, too (although, legal tender laws is considered to be a lesser reason). I believe Edsanville is in full agreement with MR.

Truthfully, if we use Mosler's and MMT's "gun to the head" analogy, we just wind up getting lost in another political discussion. I believe that's at least partially why MR deviates from MMT/Chartalism on this.

[moda0306]

I'm still stuck between MR and MMT on that one.  It's not like we have guns to our head in how we behave.  We actually desire to use dollars.  However, I can't help but think that the taxation adds a unique element to the recipe.

If we stopped taxing, the currency would still have value.  However, this would be much more fragile if the population thought the government would never tax again.  I think it would leave our currency in a more fragile state for reasons only our collective subconscious can understand.

But in the end that's just my "gut feel."

[Gumby]

I'm still stuck between MR and MMT on that one.  It's not like we have guns to our head in how we behave.  We actually desire to use dollars.  However, I can't help but think that the taxation adds a unique element to the recipe.

If we stopped taxing, the currency would still have value.  However, this would be much more fragile if the population thought the government would never tax again.  I think it would leave our currency in a more fragile state for reasons only our collective subconscious can understand.

But in the end that's just my "gut feel."

For what it's worth, Cullen expounded on it further in this side comment:

Yes, the govt can and does choose what is used to pay taxes. In our system, the govt chooses the unit of account (the USD) and then outsources money creation to the banks who create the loans that create the deposits that the govt redistributes in the means of taxes and spending. But I think you have to be careful assuming that the govt FORCES us to use money. Resources always precede money. Therefore, output always precedes money. To claim that the money can be forced upon us is to assume that the output can be forced on us as well. I think it’s more accurate to say that we choose to be productive and that this output sustains the money system. It’s not the butt of a government gun that sustains the output that we USE MONEY to chase after….Balance matters here. Always start with output as the end and money as the means. For instance, Mugabe didn’t run out of power and guns and murderers in Zimbabwe. He ran out of output.

Source: http://pragcap.com/understanding-the-mo ... ent-141831

I dunno. I say both. I still say that taxing enables the masses to hold government officials responsible for their actions (even if their fiat dollars are shredded on tax day).

But, if you were trying to avoid political discussions, Cullen's explanation makes a lot of sense.

[Gumby]

If you think about it, the entire premise of the PP depends on MR being accurate.

Bingo. That's pretty much the only reason why I ever discuss MR.

[notsheigetz]

I voted "don't know/don't care" although what I really mean is that "I don't know, but do care".

I also voted "don't know/don't care" but debates like this do help increase my confidence in the PP. If people of diametrically opposing views on economics still come to the conclusion that the PP is the safest strategy, then once again all bases are covered without me having to figure out which theories are correct.

[Lone Wolf]

But it is not the tax that gives the money its true value or demand. It is the efficient and accepted mobilization of these resources that gives the money value and helps maintain its demand.

Bingo.  One of many, many reasons that MR is a far superior framework to MMT, even if I don't count myself as an MR adherent per se.  MMT is riddled with errors, politically-tilted thinking, and all kinds of nonsense that actively inhibits arriving at correct economic conclusions.  MR did a good job in finding these problems and correcting them.  (This tax thing is only one example of many that MR gets right and MMT gets wrong.)

While I disagree with many of the analyses that come out of MR, it is at least making a strong, good-faith, and generally accurate attempt at describing the system as it works.  MMT does not do this.  It is a Utopian framework that makes many completely incorrect assumptions.  There was a time when MMT had some traction on the forum but I think (hope?) those days are in the past.

If you think about it, the entire premise of the PP depends on MR being accurate.

Bingo. That's pretty much the only reason why I ever discuss MR.

I know that you guys mean well, but can you please not say things like this?

The PP does not need or require any specific economic worldview.  Harry Browne was from the Austrian school and literally booed government deficits in his final investment radio shows.  And his portfolio works every bit as well as yours.

Imagine you're talking to someone that's thinking of adopting the Permanent Portfolio.  If you tell them that it works because an alien (to them) economic framework says so, you are requiring that they believe in this economic framework before they can believe in the Permanent Portfolio.

This unnecessarily raises the mental price of entry to embracing the portfolio.

The Permanent Portfolio requires only that you believe that the economy will always be in some mix of four major states: prosperity, recession, inflation, and deflation.  We all need the humility to admit that our economic frameworks are insufficient to reliably predict which of these states we will be in at any given time.

The philosophy is to hedge against everything.  Accept the uncertainty and chaos of the real world and execute a simple plan to deal with it.  Don't develop attachments to worldviews that can and will cloud your investment thinking.

[Gumby]

I know that you guys mean well, but can you please not say things like this?

The PP does not need or require any specific economic worldview.

I agree with what you're saying. That's true. But, what we meant, specifically, was simply understanding the mechanics of why there is no perceived default risk with Treasury bonds. That's all. The PP does depend on that. A lot of people don't understand those mechanics and think that the government will run out of money and be unable to pay its bills. HB was clear that it couldn't happen. We can either take his word (which many are willing to do) or we can try to learn why he was right. But, yeah, I guess we can refrain from making those kinds of extreme statements.

[Lone Wolf]

I agree with what you're saying. That's true. But, what we meant, specifically, was simply understanding the mechanics of why there is no perceived default risk with Treasury bonds. That's all. A lot of people don't understand those mechanics and think that the government will run out of money. HB was clear that it couldn't happen.

That's right.  Browne said (and I agree) that Treasuries are "virtually free of credit risk".  Not inflation risk, of course, hence the portfolio's hedges with gold coins in a safe deposit box.  (Or secured in the rectum if this is your thing.)

Now with sufficient imagination, we can all concoct scenarios in which there is a default of some kind on Treasuries.  These scenarios are all some version of Armageddon-lite, though, and in all these cases, that 25% in gold is going to be covering our butts in a major way.

I just like the fact that with this portfolio, any or all of us can be completely right or wrong about which model (Austrian, MR, Monetarist, Neo-Classicist, Keynesian, or whatever) is correct... and everything will still continue working just as before.

I'm glad we agree on that, in part because it helps us all sleep at night and it helps take a bit of the "life or death/Thunderdome" edge off of some of the economic debates. 

[Mdraf]

While a traditional "default" is not in the cards what if, as Lord Turner - the former chief of the Financial Services Authority in Britain -  has suggested, the Fed simply writes off its Treasury portfolio financing "prior" deficits. This could be done with a flick of a switch, reducing our government  debt to a manageable percentage of GDP at a stroke ? Would that not constitute a default?

[Gumby]

While a traditional "default" is not in the cards what if, as Lord Turner - the former chief of the Financial Services Authority in Britain -  has suggested, the Fed simply writes off its Treasury portfolio financing "prior" deficits. This could be done with a flick of a switch, reducing our government  debt to a manageable percentage of GDP at a stroke ? Would that not constitute a default?

Sorry, but what is a "manageable" percentage of GDP if you just admitted that "a traditional default is not in the cards"?

See: Robert J. Shiller: Debt and Delusion

For instance, Japan's is over 214% and they have no problem servicing their debt. How do we know what is "manageable" if Debt/GDP thresholds are fairly meaningless, in terms of default, for a currency issuer:

After all, debt (which is measured in currency units) and GDP (which is measured in currency units per unit of time) yields a ratio in units of pure time. There is nothing special about using a year as that unit. A year is the time that it takes for the earth to orbit the sun, which, except for seasonal industries like agriculture, has no particular economic significance.

Source: http://www.project-syndicate.org/commen ... d-delusion

But, if you're simply talking about having a smaller government, that's a different story altogether.

[moda0306]

I think we need to be a little careful about the assumption that any government debt crisis would get a hopeful bounce from hold even if default risk started to enter the picture.

2008 brought a very slight rise in gold. If our long-term bonds go to crap and our short-term bonds do ok or get defaulted on, I'm not as confident that gold would react in time.  I mean if real interest rates are high gold's first instinct might be to go down or stay stagnant.

So I think things look a lot scarier for the PP if treasury bonds contain default risk, and to a degree that might leave gold unsure where to to go due to its typical triggers.

[moda0306]

I mean haven't we agreed that the PP is built for a sovereign fiat currency that will not overtly default?  And that any real default risk makes the PP work considerably differently (a la Greece in Europe)?

[Kshartle]

They do contain the smallest amount of default risk. Even Browne recognized this. He was a master of the English language and no doubt understood perfectly what he was writing. In "Why The Best Laid Investment Plans...." he wrote of Treasury Bonds: "They are virtually free of credit risk, since the U.S. government can, if it needs to, can print the money to pay them off."

According to Webster's:

Virtually means -  very nearly or almost entirely
It's near antonym (near opposite) is listed as: absolutely, totally, entirely, completely etc.

Can means - to be able to do, accomplish.

The sentence could be re-written, without changing it's meaning to "They are very nearly free of credit risk, since the U.S. government is able to, if it needs to, print the money to pay them off"

This is not the same as "They are free of credit risk, since the U.S. government will, if it needs to, print the money to pay them off"

So let's not be confused about Browne saying the US government could not overtly default. The possibility is extremely remote, but as it grows larger the incentive to print grows and this provides clues to what is going on. If base money is becoming a greater percentage of the money supply it means the economic engines are getting weaker and the economy increasingly needs to be propped up with printing. Maybe gold and stocks don't go anywhere and it takes more and more printing just to keep prices from falling. This is a signal that the economy needs to re-adjust and wants to re-adjust. Ignoring it does not make it go away.

I think that's where we are at now and why the economy will continue it's downtrend with periodic short-term boosts; until the printing stops and resources are re-allocated to meet market demands rather than centrally planned artificial demands.

[Kshartle]

This is why the FED is stuck and why it's still printing despite evidence that it's not helping the economy.

It's like how I believe Andrew Jackson described slavery: "Its like you've got a wolf by the ears. You hate every second of it but you don't dare let go".

The FED doesn't dare let go but there is little hope it will end well.

It's buddies probably also make a killing front-running everyone also. And politicians love it because recessions are very bad for incumbents.

[Kshartle]

Are banks counterfeiters?  Why or why not?

The definition of counterfeit is made in imitation so as to be passed off fraudulently or deceptively as genuine; not genuine; forged:

I would submit that 99% of the population isn't aware of fractional reserve banking or how money is created. Banks don't advertise this so there is an element of deception. However they are legally permitted to deceive. So that's the rub. If you believe that legality trumps all then no.

If a soldier kicks down a door in Fallujah and shoots a kid he thinks has an AK but doesn't is he a murderer? Looks like one, smells like one, but is he one..........

Browne wrote on page 30 of "How you can Profit from the coming devaluation" - Inflation is the printing of paper money substitues that are not backed by real money. And it doesn't matter who does the counterfeiting. Any increase in paper money-not backed by real money in storage-is going to cause the same reaction: prices will be higher than they would have been without the inflation.

I would disagree slightly and say counterfeiting is only the illegal reproduction of something with intent to defraud etc.

But the effect is the same. That's why it's easier to understand how the government printing is bad. It's OBVIOUS that anyone else doing it is bad. If they are functionaly identical then it's easy to see that government/FED printing hurts more than it helps.

[MediumTex]

When does anyone think that prices will start rising in a strong and sustained upward direction in response to Fed policies?

I'm assuming we all agree that prices have been pretty stable (especially wages) in the five years or so since the Fed began its "printing."

All I hear from people is how hard it is to raise prices in the current environment.  I just wonder when anyone thinks that will change beyond the Fed's inflation target of 3-4%.

[moda0306]

Are banks counterfeiters?  Why or why not?

The definition of counterfeit is made in imitation so as to be passed off fraudulently or deceptively as genuine; not genuine; forged:

I would submit that 99% of the population isn't aware of fractional reserve banking or how money is created. Banks don't advertise this so there is an element of deception. However they are legally permitted to deceive. So that's the rub. If you believe that legality trumps all then no.

If a soldier kicks down a door in Fallujah and shoots a kid he thinks has an AK but doesn't is he a murderer? Looks like one, smells like one, but is he one..........

Browne wrote on page 30 of "How you can Profit from the coming devaluation" - Inflation is the printing of paper money substitues that are not backed by real money. And it doesn't matter who does the counterfeiting. Any increase in paper money-not backed by real money in storage-is going to cause the same reaction: prices will be higher than they would have been without the inflation.

I would disagree slightly and say counterfeiting is only the illegal reproduction of something with intent to defraud etc.

But the effect is the same. That's why it's easier to understand how the government printing is bad. It's OBVIOUS that anyone else doing it is bad. If they are functionaly identical then it's easy to see that government/FED printing hurts more than it helps.

If I "printed money in my basement," deposited it in my TD Ameritrade account and bought some T-Bills with it, and that's it, then I have done something similar to what the fed does when it prints money.  This is going to have a very, very different effect than if I take that money and go out and spend it on stuff. 

[Libertarian666]

When does anyone think that prices will start rising in a strong and sustained upward direction in response to Fed policies?

I'm assuming we all agree that prices have been pretty stable (especially wages) in the five years or so since the Fed began its "printing."

All I hear from people is how hard it is to raise prices in the current environment.  I just wonder when anyone thinks that will change beyond the Fed's inflation target of 3-4%.

Some prices have been anything but stable: The S&P 500 has almost doubled from the low in 2009, and the housing market is now roaring ahead.

That's where the money has been going.

[Gumby]

The possibility is extremely remote, but as it grows larger the incentive to print grows and this provides clues to what is going on.

Either you've misconstrued what Browne wrote, or Browne didn't want to wade into the mechanics in his book (i.e. he oversimplified it). There is no "Printing Press" that is rolled out to fund the government when the debt somehow appears to be large. Any left over T-Bonds at auction are always purchased by the excess reserves in the banking system that is created by previous government spending. If the reserves don't exist, they either delay the auctions until they do exist or the Fed makes a short term loan to create the reserves and then the reserves are paid back to the Fed once the Treasury spends to create the reserves. That's how it works. The system is rigged so that the banking system always has the reserves to buy Treasuries at auction.

Currently there is ZERO problem of finding the reserves to buy Treasuries at auction because THERE IS A LARGE SURPLUS OF RESERVES right now that the banks would love to swap for Treasury bonds!

If base money is becoming a greater percentage of the money supply it means

It means very little since Base money is only about 5% of the broad money supply.

[MediumTex]

When does anyone think that prices will start rising in a strong and sustained upward direction in response to Fed policies?

I'm assuming we all agree that prices have been pretty stable (especially wages) in the five years or so since the Fed began its "printing."

All I hear from people is how hard it is to raise prices in the current environment.  I just wonder when anyone thinks that will change beyond the Fed's inflation target of 3-4%.

Some prices have been anything but stable: The S&P 500 has almost doubled from the low in 2009, and the housing market is now roaring ahead.

That's where the money has been going.

The S&P 500 is only slightly higher than it was over a decade ago.

Housing prices have increased from their recession lows, but they are still mostly lower than their 2006-2007 peaks.

An asset recovering to pre-crisis price levels isn't really what I think of when I think of inflation.

My parents bought a house in 1972 for $12,500 and sold it in 1981 for $59,500.  That's inflation.