Gyroscopic Investing

moda0306 wrote: His equation isn't really quantity theory though, because it contains a velocity element.

I believe QMT does contain a velocity element. The problem is not that QMT doesn't account for velocity. It does. The problem is...

Critics of the theory argue that money velocity is not stable and, in the short-run, prices are sticky, so the direct relationship between money supply and price level does not hold.
Source: http://en.wikipedia.org/wiki/Quantity_theory_of_money

And Monetarists — who love to cite velocity — have been way off the mark. Here's an article from 1986:

Fortune: MONETARISM ISN'T DEAD Critics say the theory doesn't work because the world has changed. Here's why they are wrong

The article ends with the following paragraph:

The Fed's flexible policy drove the U.S. economy into the Great Depression in the Thirties and into prolonged inflation in the mid-Sixties. YET MANY POLITICIANS and economic columnists have been calling for more Fed activism than ever before. All those appeals come down to asking the Fed to pursue a more inflationary policy in hopes of temporarily spurring economic growth. The arguments for pumping out more money can be wildly inventive. Take the oil situation. Many people have been arguing that the Fed can safely apply more stimulus now because the drop in oil prices reduces inflation. But many of those same people also wanted more stimulus when oil prices were rising in the Seventies. Back then they argued that faster money growth was needed to counteract the depressing effect that oil price increases were having on the economy. They apparently have one rule of thumb: whatever happens, raise money growth. The monetarist prescription of stable and predictable noninflationary policy is much more likely to foster sustained economic growth. But it has considerably less political appeal than an activist policy. Indeed, since it deprives political entrepreneurs of the chance to manipulate money growth for near-term benefits, it has no political appeal at all. That probably is the greatest reason for the political death of monetarism. It will remain dead at least until the consequences of its demise gradually emerge and inflation accelerates again. Unless the Fed changes its ways or we are blessed with another bout of extraordinary good luck, that should happen sometime next year.

Next year?? That was 1986! Monetarists will suddenly claim they are correct the day inflation returns. Annny daaay now...

News flash to Monetarists.... There is no simple nifty formula that predicts inflation based on government spending.

Gumby,

Ok so maybe I was wrong about QToM... but I'm still almost sure that was the "missing link" of QToM...

Regardless, I don't think he's really saying "hyperinflation tomorrow," and most monetarists, I thought, were FOR expanding money in recessions, and that the Austrians were the ones who thought "inflation tomorrow."

Headache.

moda0306 wrote:Ok so maybe I was wrong about QToM... but I'm still almost sure that was the "missing link" of QToM...

I'm not sure what you mean. QToM always included velocity.

http://en.wikipedia.org/wiki/Quantity_t ... f_exchange

The missing link is that velocity isn't stable and velocity changes whenever the money supply changes. Monetarism is dead. Please don't revive it.

John Maynard Keynes criticized the quantity theory of money in The General Theory of Employment, Interest and Money. Keynes had originally been a proponent of the theory, but he presented an alternative in the General Theory. Keynes argued that price level was not strictly determined by money supply. Changes in the money supply could have effects on real variables like output.

Ludwig von Mises agreed that there was a core of truth in the Quantity Theory, but criticized its focus on the supply of money without adequately explaining the demand for money. He said the theory "fails to explain the mechanism of variations in the value of money"
Source: http://en.wikipedia.org/wiki/Quantity_t ... Criticisms

OK I get it, but monetarism wasn't predicting hyperinflation, was it?

I thought that was the Austrians?

moda0306 wrote: OK I get it, but monetarism wasn't predicting hyperinflation, was it?

I thought that was the Austrians?

I don't know if I'd go as far as to say that Monetarists were officially predicting hyperinflation. But, they were certainly warning about it. It doesn't really matter. People stopped listening to the Monetarists when even moderate inflation never materialized when they said it would. There is no magic formula to predict inflation based on velocity and the money supply.

moda0306 wrote: OK I get it, but monetarism wasn't predicting hyperinflation, was it?

I thought that was the Austrians?

Some Austrians predict hyper-inflation, but definitely not all of them.  For example, Mike Shedlock is an Austrian who thinks the US will be in deflation for a decade or more.

Gumby, I want to understand your point about how a wealth tax would be in danger of causing more government intrusion. Currently all bank accounts and accounts with stock brokers etc have to be reported don't they if they involve any taxable transactions? If you buy or sell a piece of art or gold bullion or whatever that has to be reported? When you die your entire estate needs to be reported. I just don't see where the current privacy exists that potentially could be lost? I was presuming that it would work by largely having self reporting and having the rule that if the tax wasn't up to date on anything then it wasn't legally yours. It would then be confiscated and you could buy it back if you so wished on the open market or whatever. Perhaps I'm being naive but on the face of it it all seems a lot more transparent and straightforward than the current set up

A big difference would be that a very large chunk of the economy would become entirely free of the government. Providing goods and services would entail no sales, income, payroll, corporation etc etc tax.

Gumby, a big part of why I think a citizens' dividend might be a good idea is because it might mean that everyone would have the financial freedom to start up employee owned companies.

I heard an interesting Radio program about employee ownership:
http://www.employeeownership.co.uk/news ... programme/

I also loved the King of the Hill episode about employee ownership:
Season 11:"Raise the Steaks"
"After buying tough, unsavory steaks at the Mega-Lo-Mart, Hank, at Appleseed's suggestion, visits the town co-op in search of better meat. After falling in love with the delicious organic food, Hank becomes a co-op volunteer and co-owner. The co-op starts to make money and eventually is bought out by the Mega-Lo-Mart corporation, which turns it into a "Mega-Lo-Op" that doesn't live up to the original co-op "fresh" mentality. Motivated to preserve something of the original co-op, Hank convinces Appleseed that they should start their own mini co-op farm in his backyard. Cattle from the farm wander onto Kahn's property and the plan is no longer Prime."

stone wrote: Gumby, I want to understand your point about how a wealth tax would be in danger of causing more government intrusion. Currently all bank accounts and accounts with stock brokers etc have to be reported don't they if they involve any taxable transactions?

You just report what was exchanged — almost as if the transaction was done in public, with people witnessing it. You don't often need to report the size, or contents, of your accounts.

stone wrote:If you buy or sell a piece of art or gold bullion or whatever that has to be reported?

Yes. For all practical purposes the transaction — between two parties — is done in public. And sure enough, a record almost always exists for all transactions anyway. This is fundamentally different from keeping something in your home with the prying eyes of government auditing your belongings.

stone wrote:When you die your entire estate needs to be reported.

Again. This is a transaction between someone who is dead and you the receiver. It's the deceased individual's belongings that are audited. Therefore the deceased individual's right to privacy is violated, but there's not much he can do about it. A lot of people already don't like this.

stone wrote:I just don't see where the current privacy exists that potentially could be lost?

The difference is that every year, the government is rummaging through your belongings — your wine collection, your furniture, your clothes, your life. Currently, they are only watching transactions between two parties.

stone wrote:I was presuming that it would work by largely having self reporting and having the rule that if the tax wasn't up to date on anything then it wasn't legally yours.

Do you think that make people want to buy artwork or wine or sports cars? Or would it make people less likely to buy those things?

stone wrote:It would then be confiscated and you could buy it back if you so wished on the open market or whatever. Perhaps I'm being naive but on the face of it it all seems a lot more transparent and straightforward than the current set up

It doesn't sound like fun to me. But, that's just my opinion. If you're curious about what other people think, why don't you start a new thread about the potential privacy and logistics issue of a wealth tax (without getting into the economic principals) and see what people think about it?

stone wrote:A big difference would be that a very large chunk of the economy would become entirely free of the government. Providing goods and services would entail no sales, income, payroll, corporation etc etc tax.

I'm not sure what you mean by being free of government. I think you're just trading one side of government for another. So, the transactions aren't taxed, but every belonging you obtain is taxed until eternity. Sounds awful to me. I'd much rather pay a single one-time tax on a piece of artwork, or a bottle of wine, or a car, than a tax every single year.

I think you're not thinking about how those eternal taxes would shape the way people value culture (art, belongings, etc) and privacy (the right to store one's wealth and keep government's prying eyes out of your life).

Gumby, to me it would mean that art would be owned by people who actually wanted to look at it enough to be willing to pay for it. Similarly homes would be owned by people who wanted to live in them. In the UK we have a huge number of houses that are under occupied because they are being used as saving vehicles rather than as dwellings. Don't you think it would make pricing more rational?

stone wrote: Gumby, to me it would mean that art would be owned by people who actually wanted to look at it enough to be willing to pay for it. Similarly homes would be owned by people who wanted to live in them. In the UK we have a huge number of houses that are under occupied because they are being used as saving vehicles rather than as dwellings. Don't you think it would make pricing more rational?

Why exactly should a castle be worth less because it's vacant or isn't producing widgets? Perhaps it will be lived in someday, generations from now.

You are unfairly punishing anything of high quality. People pay more for things of high quality for a number of reasons. One reason is perhaps because those things tend to store their value better. If someone wants to purchase a Harley Davidson motorcycle — arguable a work of high craftsmanship. (Some might even say it's a work of art on wheels). People would have to price it according to how many years they plan on owning it for, if a wealth tax is levied. The transactional tax is a one time payment that allows you to gain value more value out of owning something for 30 years or more.

What you would find over time is that the craftsmen from Harley Davidson, or the luxury goods providers, or the artists, would not be valued nearly as much (due to the annualized wealth tax on everything they produce). Those craftsmen would find more "productive" jobs. Who are you to say which jobs are more productive than others??

I really don't understand why you would want to deter someone from storing wealth. It's not like holding a gold coin in a vault is such a terrible thing. When I buy gold, the money goes into the gold dealer's bank account, and he uses it buy things. I buy a safe to store gold and the safe-maker makes a living that way. Where is the crime?

...and furthermore. No one wants to submit an annual itemized list of every trinket and good they've ever purchased in their lifetime. It's an invasion of privacy!

What's to stop the government from asking questions about the things you collect? (guns, communist uniforms, Cuban cigars, etc.). You think people mistrust government now...? Just wait until they have to submit that itemized list every year.

Gumby, everything currently owned by the private sector would still be owned by the private sector unless they donated it to museums or whatever. Already in the UK, the palaces all got donated to the National Trust because during the 1940-1980 period tax reasons meant that people didn't want to/couldn't afford them as private property. The result is that millions of people get to marvel at those works of art and craftsmanship rather than a handful of people. If someone made an amazing artwork it would still pay for itself but from people wanting to see it on an art gallery.

Some types of high quality might actually get patronized more than now. People might pay more for performance art, gastronomy or whatever.

I see no crime at all in wanting to hold gold coins or whatever. If there was an asset tax system then gold coins would probably be a lot cheaper and so you would be able to buy lots of them if that was what you liked. I'm not even convinced that gold wouldn't still be a useful reserve holding from a financial point of view despite paying an annual tax. Stocks etc would need to be rebalanced against something just as now.

Remember the total tax take by the government would be no more than now.

stone wrote: Gumby, everything currently owned by the private sector would still be owned by the private sector unless they donated it to museums or whatever. Already in the UK, the palaces all got donated to the National Trust because during the 1940-1980 period tax reasons meant that people didn't want to/couldn't afford them as private property. The result is that millions of people get to marvel at those works of art and craftsmanship rather than a handful of people. If someone made an amazing artwork it would still pay for itself but from people wanting to see it on an art gallery.

So... no one has an incentive to own nice things or produce nice things? Sounds great. Can't wait to see the styles and fashion in Stonelandia. I'm picturing lots of burlap.

I find your answer rather frustrating. I used a high quality piece of craftsmanship — a Harley Davidson — as an example, and you say that palaces and artwork can hang in an art gallery.

stone wrote:Some types of high quality might actually get patronized more than now. People might pay more for performance art, gastronomy or whatever.

So... no incentive for high quality objects. Only high quality consumables. You want to incentivize a consumable culture?

stone wrote:I see no crime at all in wanting to hold gold coins or whatever. If there was an asset tax system then gold coins would probably be a lot cheaper and so you would be able to buy lots of them if that was what you liked.

I don't follow. Gold is an international market that people use to protect themselves from government promises. If people didn't like Stonelandia-bucks, they'll have to enter a global market where Chinese and Indian consumers are clamoring for gold. It's not going to be "cheaper" because people in Stonelandia look at it differently.

stone wrote:Remember the total tax take by the government would be no more than now.

Not true from the perspective of the tax payer. When someone retires, they have much less income and therefore pay less taxes under our current system. Under your system, they'll need to purge all their belongings and "wealth" in order to pay less taxes. In my opinion, your system reeks of ageism against retirees.

Gumby, like I said, I agree with the MMT line that pay-as-you-go retirement provision is the method that makes most sense to me. As far as private savings go, people could have built up much more savings during their lives because they wouldn't have been paying other taxes and retirees along with everyone else would not pay sales tax on stuff they bought.

Your point about gold being a global market is true and so if the country having the system was small your point would hold.

I don't see how buying a Harley could be thought of as being less consumerist than paying to see a concert. I have no problem with people spending more on one than on the other. To be honest it probably wastes less natural resources having performing art than art "things" but that wasn't part of my reasoning.

I'm all for people buying things because they want those things as things. To me the distortion comes in when people want things as saving vehicles. My ideal is for people to have and do the stuff they want limited only by how that impacts the extent to which other people can have and do the stuff they want. The whole point of money is so as to allow that to happen. To my mind that gets distorted under our current system very severely. To my mind the route cause of those distortions is the fact that asset prices are not a "cost" but rather an attraction. That makes people do stuff that they would never do if money didn't exist but we were somehow able to telepathicly communicate to sort out what everyone did and got to everyones satisfaction. I'm just trying to avoid that distortion.

stone wrote:I'm all for people buying things because they want those things as things. To me the distortion comes in when people want things as saving vehicles.

Ah, but people want to buy a Harley because A) it's beautiful, and that gives them enjoyment, and B) because it's 'high quality,' so they will get a lifetime of enjoyment out of it. So, in essence, the rider is investing in his happiness. He plunks down more money for the fine craftsmanship (and pays a sales tax) and the fine craftsmanship provides him with a lifetime of enjoyment. Some of it is certainly Money Illusion. But, it makes the rider happy.

In Stonelandia, the rider needs to plunk down the extra (tax free) money to pay for the fine craftsmanship, but he also needs to pay an expense ratio every year (wealth tax) to enjoy that Harley — even through his retirement. (Perhaps you could argue that the flat cost of the Harley was lower in Stonelandia — but if some of the materials came from overseas, that might not be entirely true.)

Over the course of 40 years, the expense ratio (wealth tax) of the bike would be a constant drain from that riders savings. And even his savings would be slowly drained by the wealth tax. Perhaps you could argue that the overall taxes out of the rider's pockets are the same as what we currently have, but I think that assumes that everything else is constant. The problem is that taxes affect people's behavior — and that is a powerful weapon for a government. Add a tax to cigarettes and less people will smoke. You make a disincentive for smoking that way. Add a tax deduction to investing in education, or charity, and you incentives those educational and charitable donations and investments.

The very existence of the wealth tax itself prevents someone from making the same choices that they would make without the wealth tax. In other words, people would be changing their definition of happiness to suit your tax code that disincentives a wide range of hard assets and investments. That seems awfully repressive. Some say a smoking tax is repressive — even though smoking itself is a drain on healthcare resources. It's the same thing.

In other words, it has less to do with a simple formula and much, much more to do with modifying one's idea of happiness. Outside of the Stonelandia, the rider has the freedom to choose a lifetime of riding happiness without government fees. In Stonelandia, the rider has an annual expense ratio — however psychological it may be.

Furthermore, we currently incorporate Money Illusion into our happiness calculations. Even though that seems irrational, it's the way we are wired. You would be eliminating that irrational layer of happiness as if you were performing a lobotomy on society. Not cool, Stone.

stone wrote:My ideal is for people to have and do the stuff they want limited only by how that impacts the extent to which other people can have and do the stuff they want. The whole point of money is so as to allow that to happen.

I though the point of money was Life, Liberty and Pursuit of Happiness? You've removed the Liberty and Pursuit of Happiness from the equation! Since when do capitalists care what other people can have?

stone wrote:To my mind that gets distorted under our current system very severely. To my mind the route cause of those distortions is the fact that asset prices are not a "cost" but rather an attraction. That makes people do stuff that they would never do if money didn't exist but we were somehow able to telepathicly communicate to sort out what everyone did and got to everyones satisfaction. I'm just trying to avoid that distortion.

We agree that the distortion is damaging to others. However, I believe that the "freedom" to enjoy one's own Money Illusion happens to be a path to happiness for a capitalist — despite its terrible drawbacks and consequences.

We, as humans, are flawed. We are greedy. In fact, all animals are greedy by nature — gobbling up food and resources without a care for other animals or the ecosystem, to the point of self-destruction. A tax code isn't going to change our innate wiring.

Gumby, I don't much like the big government system in Sweden etc but those countries do show that poverty is not an inevitable consequence of human nature. The way the system is set up can change a previously poor population into a prosperous one. You seem to consider that our current set up is somehow "natural". It actually is fairly unprecedented. Also a lot of people now don't have much liberty. They are more or less debt peons.
You worry that I'm assuming that everything else will be constant. I'm not, I'm only suggesting this idea in the hope that it might make everything else much better. Without a huge parasitic FIRE sector and without >10% unemployment, people would be much more prosperous/happy/endowed with liberty. That is the only reason behind it. I'm entirely agnostic about the merits of Harley Davison motor bikes versus concert performances or whatever.

I don't believe I ever said that "poverty" was inevitable. If you want a small FIRE sector, than just create a law that regulates the FIRE sector (again). No need to modify every aspect of capitalism as we know it to achieve that.

Gumby what law would moderate the FIRE sector when the net financial assets are on a scale that they are now? Will that still work when the Forbes 100 are all trillionaires? How are you hoping to hold your thumb in the dike to hold back the political lobbying power of a host of trillionaires?

Stone. I'm not a legal expert. You can hardly expect me to know what laws will work and what won't. Some people think re-instating the Glass–Steagall Act and breaking up the large banks is a lot easier than re-inventing capitalism.

What kind of economics system do you think your policies would fall under? They don't sound like run-of-the-mill capitalism to me. Definitely some kind of Post-Capitalism. Perhaps you're advocating Economic democracy?

http://en.wikipedia.org/wiki/Economic_democracy

Gumby, I think the issue is that with every extra trillion of net financial assets you will need to concoct a more stringent regulatory framework and with every extra trillion that will be subverted more effectively by lobbying. As TripleB said, the DoddFrank actually gave an advantage to the big boys. Lehmans would not have been hindered by Glass Stegal. Goldman Sachs is only a "bank holding company" when they truely want to take the piss. To me the idea of using regulation is like trying to hold back a river by each hour adding an extra layer of bricks to the dam as the water level increases.

The kind of regulations Bill Mitchel advocates are allowing no bank lending against collateral (ie no mortgages). That seems pretty extreme to me but I think such MMTers at least see just what a pickle the endless deficits lead us into. To me the key thing is to avoid the problem in the first place by not pumping out more and more net financial assets.

stone wrote: Gumby, I think the issue is that with every extra trillion of net financial assets you will need to concoct a more stringent regulatory framework and with every extra trillion that will be subverted more effectively by lobbying. As TripleB said, the DoddFrank actually gave an advantage to the big boys. Lehmans would not have been hindered by Glass Stegal. Goldman Sachs is only a "bank holding company" when they truely want to take the piss. To me the idea of using regulation is like trying to hold back a river by each hour adding an extra layer of bricks to the dam as the water level increases.

I don't know what to tell you, Stone. You've got to start somewhere. You can't just wish every aspect of the system was entirely different.

stone wrote:The kind of regulations Bill Mitchel advocates are allowing no bank lending against collateral (ie no mortgages). That seems pretty extreme to me but I think such MMTers at least see just what a pickle the endless deficits lead us into. To me the key thing is to avoid the problem in the first place by not pumping out more and more net financial assets.

Great. But, I'm just not as interested in discussing the theoretical side of MMT or the monetary system. We live in a world where our money supply tends to continuously increase over time. You can call it evil and terrible, but that's our reality. What else can I tell you?

Gumby, I suppose you have faith that our entirely novel and revolutionary expanding fiat money system will be able to successfully continue. What I don't sense though is that you acknowledge just how much our current system ensures that the monetary set up in ten years time will have been transformed because of the expansion and that ten years later it will have been transformed again and so on and that each of those transformations will take things further out away from conventional capitalism of the sort that has occurred previously in history.

Stone, you clearly advocating the Post-Capitalistic prescriptions of Economic Democracy (and Democratic socialism). Economic democracy supports all of the ideas you support (asset tax, social dividend, profit sharing, etc.)

http://en.wikipedia.org/wiki/Economic_democracy

It all sounds very interesting, and I'm sure there are a lot of benefits to that social model. Can we just leave it at that?

Gumby, thanks a lot for finding that link. It does look interesting. I'll check it out. Cheers.