Gyroscopic Investing

I've read the debt based currency wikipedia link, and I've read the MMR paper 3 or 4 times now.  I agree the accounting is just a gimmick, etc, etc.  The govt issues its own currency and can't default on it.  However, I still feel like I'm missing something.  At the end of the day, it seems like this thing suggests that the more the government spends, the more "vertical money" it creates, the wealthier we all become.  Is that really what MMR boils down to?

moda0306 wrote:Viewing base money as "backed" by debt in a traditional way is a mistake.  It's all just paper made valuable by taxation & legal tender laws.

That's true, even from a technical standpoint. The Treasury explains...

Federal Reserve notes are legal tender currency notes. The twelve Federal Reserve Banks issue them into circulation pursuant to the Federal Reserve Act of 1913. A commercial bank belonging to the Federal Reserve System can obtain Federal Reserve notes from the Federal Reserve Bank in its district whenever it wishes. It must pay for them in full, dollar for dollar, by drawing down its account with its district Federal Reserve Bank.

Federal Reserve Banks obtain the notes from our Bureau of Engraving and Printing (BEP). It pays the BEP for the cost of producing the notes, which then become liabilities of the Federal Reserve Banks, and obligations of the United States Government.

Congress has specified that a Federal Reserve Bank must hold collateral equal in value to the Federal Reserve notes that the Bank receives. This collateral is chiefly gold certificates and United States securities. This provides backing for the note issue. The idea was that if the Congress dissolved the Federal Reserve System, the United States would take over the notes (liabilities). This would meet the requirements of Section 411, but the government would also take over the assets, which would be of equal value. Federal Reserve notes represent a first lien on all the assets of the Federal Reserve Banks, and on the collateral specifically held against them.

Federal Reserve notes are not redeemable in gold, silver or any other commodity, and receive no backing by anything This has been the case since 1933. The notes have no value for themselves, but for what they will buy. In another sense, because they are legal tender, Federal Reserve notes are "backed" by all the goods and services in the economy.

Source: http://www.treasury.gov/resource-center ... ender.aspx

It really is just confetti.

moda0306 wrote:Here's one exercise I like to use to try to help myself and others visualize the relevance of "public" debt/money to a currency user in the private sector with a financial balance sheet...I hope that clarifies my position, as well as maybe the way Gumby looks at it (not sure if this is how he likes to view it to help him visualize the drivers of the system).

Yes, I look at it in a similar manner. Treasuries are basically savings accounts that are handed out to the private sector.

The part that I find fascinating is that the interest payments basically causes debt to keep rising over time:

Critics of fractional reserve banking claim that since money creation requires loans from the banking system, people are required to go into debt in order for any new money to be created. They assert that this can debase the means of exchange. Critics find it problematic that banks "create money out of nothing."

One criticism posits that since debt and the interest on the debt can only be paid in the same form of money, the total debt (principal plus interest) can never be paid in a debt-based monetary system unless more money is created through the same process. For example: if 100 credits are created and loaned into the economy at 10% per year, at the end of the year 110 credits will be needed to pay the loan and extinguish the debt. However, since the additional 10 credits does not yet exist, it too must be borrowed. This implies that debt must grow exponentially in order for the monetary system to remain solvent.

Source: http://en.wikipedia.org/wiki/Criticism_ ... ve_banking

And this phenomenon is exacerbated by the combination of a debt-based monetary system (our vertical money) with a credit-based monetary system (or horizontal money).

The only exceptions to this phenomenon is when creditors are constantly spending money back into the hands of debtors before loans are due — but that doesn't really happen very often, and it certainly doesn't happen when the economy slows down. So, you can see why a growing debt is often necessary if you want the private sector to remain solvent.

moda0306 wrote: the currency, but in reality the relationship is anything but.  A central bank, on its own, cannot engineer the value of something that it offers nothing in return for.  In a fiat world, that is the role of taxation and legal tender laws (I'd argue much more so the former than the latter... ie, we'd still use dollars if there were no legal tender laws).  If the relationship with the treasury is as ours is, it's essentially a government-issued currency, not really "backed" by debt in a traditional way.  Both cash AND treasury bonds are financial assets.  In fact, T-bills have

I'm not sure this is a full and complete explanation for why those outside the USA prefer the dollar as their medium of exchange when all is said and done.  Domestic taxation and legal tender laws have no effect on them as currency users.  So I think what is missing is the Bretton Woods agreement that established the dollar as the world's reserve currency.  Arguably, that is a more powerful force than taxation or legal tender laws.

MachineGhost wrote:

moda0306 wrote: the currency, but in reality the relationship is anything but.  A central bank, on its own, cannot engineer the value of something that it offers nothing in return for.  In a fiat world, that is the role of taxation and legal tender laws (I'd argue much more so the former than the latter... ie, we'd still use dollars if there were no legal tender laws).  If the relationship with the treasury is as ours is, it's essentially a government-issued currency, not really "backed" by debt in a traditional way.  Both cash AND treasury bonds are financial assets.  In fact, T-bills have

I'm not sure this is a full and complete explanation for why those outside the USA prefer the dollar as their medium of exchange when all is said and done.  Domestic taxation and legal tender laws have no effect on them as currency users.  So I think what is missing is the Bretton Woods agreement that established the dollar as the world's reserve currency.  Arguably, that is a more powerful force than taxation or legal tender laws.

It's true that Bretton Woods set the stage for the dollar financial system. But, people outside of the US don't need dollars — they just prefer dollars. There's a big difference. Americans need dollars and we're willing to use our military to preserve its spending ability on a global scale (i.e. petrodollars, etc) — which makes dollars more preferable as a stable currency. If our currency ever became unstable, you can bet people wouldn't prefer to hold it anymore. But, we'd be stuck with it due to taxation and/or legal tender laws.

hoost wrote: I've read the debt based currency wikipedia link, and I've read the MMR paper 3 or 4 times now.  I agree the accounting is just a gimmick, etc, etc.  The govt issues its own currency and can't default on it.  However, I still feel like I'm missing something.  At the end of the day, it seems like this thing suggests that the more the government spends, the more "vertical money" it creates, the wealthier we all become.  Is that really what MMR boils down to?

Hoost,

Yes, in a way, but it's not that automatic.  It helps me to realize that financial assets are simply tools to facilitate the efficient/effectivecreation & transfer of real wealth.  As I've mentioned before, building all financial assets on real investment induces an unstable system, and some NFA's into the mix helps stabilize things incredibly.  Of course, as we are reserve currency issuers, we tend to need to run larger deficits than would normally be the case to sustain a stable level of base money & T-Bills in our economy, and until 2009, we didn't.  So, yes, in that scenario, the government is printing a "financial tool" that we need... and therefore printing wealth.  Of course, this HAS to be looked at in the context that our economy is way under capacity, and both consumables and investment are not being produced to the degree that they should/could be, mainly because we don't have the financial tools to run our economy near full capacity.  Printing those tools will result in our economy running closer to full capacity, which will spur production AND investment... aka, creation of real wealth.  So it's indirect, to be sure, but I feel the economic theory around it is sound, and supply-side incentives alone will be pushing on a string when demand is too low.  I think taxes should be lowered, but not to spur on investment, directly, but to give people who will use that money a tool with which to increase aggregate demand, and therefore justify further investment, no matter what


MG,

I agree with Gumby... we've been off the gold standard for WAY too long for that to still be a factor in giving our currency value... does China really think they will someday be able to exchange all of their dollars for gold?

Our trade deficit is about $500 Billion annually.  This represents foreign demand for our currency as much as it represents domestic demand for lead toys and cheap shoes.  One thing I've seen that I don't really think is valid is for dollar-bears to say that foreigners aren't using our money any more to trade for oil, and this is a sign that the USD is falling out of favor as a reserve currency.  I'm not saying that this isn't something that should be considered, but in reality, I think we need to look at two different roles of a currency: 1) medium of exchange, and 2) store of value.

People may not use gold much as a medium of exchange, but it's a great way to diversify your "stores of value."  Likewise, if foreigners, as one big group, aren't using the dollar to buy oil as much as they used to, that doesn't mean they're not still using it as a store of value.  That may sound asinine in an era of negative real interest rates, but it appears that it's the case, because they're still "importing" our financial assets for their real goods, which means that more and more of our dollars/bonds are ending up on foreign balance sheets every year, whether or not they're actually using it at the bazaar or to buy oil.

In fact, not using the USD to engage in transactions, but still acquiring more and more of them from US consumers, MIGHT just be a sign that the the velocity of those dollars are going down, which is often a sign of someone WANTING to hold something as a store of value and not get rid of it.

I'm a little bit soft on all this, so I'm open to criticisms, but this is an incredibly interesting and relatively complex issue that I think has WAY too much hyperbole attached to it.

Gumby wrote: It's true that Bretton Woods set the stage for the dollar financial system. But, people outside of the US don't need dollars — they just prefer dollars. There's a big difference. Americans need dollars and we're willing to use our military to preserve its spending ability on a global scale (i.e. petrodollars, etc) — which makes dollars more preferable as a stable currency. If our currency ever became unstable, you can bet people wouldn't prefer to hold it anymore. But, we'd be stuck with it due to taxation and/or legal tender laws.

I also see that the Orwellian-extension of FATCA in response to the UBS tax evasion scandal as a necessary part to mainstain the blue-water-navy-petrodollar-reserve-currency hegemony.  So from a libertarian perspective, I don't find it all that objectionable.  We all benefit directly and indirectly many ways from the blue-water-navy-petrodollar-reserve-currency-hegemony and so does most, if not all, of the world.

What gives me pause and qualms is it'll take just one Hitler all over again with all this newfangled Orwellian surveilliance infrastructure...  Are we collectively evolved enough now not to have another world war, punitive war repatriations, a trade war and great depression, and a hyperinflation all to democratically elect such evil mongers?  Is that type of thing just limited to Africa now?  Someone convince me.

moda0306 wrote: 2009, we didn't.  So, yes, in that scenario, the government is printing a "financial tool" that we need... and therefore printing wealth.  Of course, this HAS to be looked at in the context that our economy is way under capacity, and both consumables and investment are not being produced to the degree that they should/could be, mainly because we don't have the financial tools to run our economy near full capacity.  Printing those tools will result in our economy running closer to full capacity, which will spur production AND investment... aka, creation of real wealth.  So it's indirect, to be sure, but I feel the economic theory around it is sound, and supply-side incentives alone will be pushing on a string when demand is too low.  I think taxes should be lowered, but not to spur on investment, directly, but to give people who will use that money a tool with which to increase aggregate demand, and therefore justify further investment, no matter what

That may be true in theory, but in reality as the Fed increasingly monetizes the debt (67% at auctions so far) and forces the general public to hold currency instead of bonds, along with banks parking their excess reserves at the Fed for balance sheet repair instead of horizontal lending, it does not monetize productivity.  Isn't this called, "pushing on a string"?  MMR does not automatically mean "net financial assets".

I agree with Gumby... we've been off the gold standard for WAY too long for that to still be a factor in giving our currency value... does China really think they will someday be able to exchange all of their dollars for gold?

China's plan is to [re?]link the renimbi to gold, so it has been covertly buying up gold bullion and gold mining companies around the world.  It seems clear they want to challenge our blue-water-navy-petrodollar-reserve-currency-hegemony.

Our trade deficit is about $500 Billion annually.  This represents foreign demand for our currency as much as it represents domestic demand for lead toys and cheap shoes.  One thing I've seen that I don't really think is valid is for dollar-bears to say that foreigners aren't using our money any more to trade for oil, and this is a sign that the USD is falling out of favor as a reserve currency.  I'm not saying that this isn't something that should be considered, but in reality, I think we need to look at two different roles of a currency: 1) medium of exchange, and 2) store of value.

A "trade deficit" is a relic of the gold standard era also.  It does not function the same way under a fiat currency system.  For just one example, half of our trade deficit is actually reimported because it is US companies who offshored the manufacturing and labor to China that and own thus, then "reimports" it to bring it back into the USA to sell.

I think that the U.S. dollar acting as a store of value in an era of negative real rates probably only applies to truly basketcase economies, like N. Korea, Bulgaria, Cuba, etc. where gold is probably also illegal to own.  The spector of the blue-water-navy-petrodollar-reserve-currency hegemony and imposition of fairness, justice and equality is projected planet-wide on each U.S. dollar bill.  What other country can currently match that physical and metaphysical arrogance?  It is truly astounding if you think deeply about it.  I am also very, very grateful it is the USA and not the Third Reich or the Soviet Union.

I'm a little bit soft on all this, so I'm open to criticisms, but this is an incredibly interesting and relatively complex issue that I think has WAY too much hyperbole attached to it.

I agree, but hyperbole attracts attention and sells.  With economics so far being more of an art than a hard science with 99% of practitioners, its a natural.

MG,

Regarding increasing NFA's, I was referring to deficit spending, not the "pushing on a string" that is QE.  Maybe I was unclear.

China is probably smart to diversify their money.  I don't see moving to other forms outside the dollar (and who would want to touch the euro at this point) as being a sign that the dollar is losing its reserve currency status... well, at least not a strong sign by any means.

Your point about the trade deficit being "reimported" is valid (is it really "half" though?  That seems way too high)... and I'm going to throw that out over at the MMR site and see what they think about it, though even foreigners own US companies, so its  all so intermingled now it's tough to tell.  I wonder if there's some measure of the dollars & treasury bonds on peoples' balance sheets, including implicitly via corporations they own stock of, and how that breaks down between foreigners and domestic holders, and how that changes over time.  

Part of the point is, though, that it helps to have enough base financial assets that aren't dependent on the productivity/value of investment (T-bills & dollars) to act as a stabilizer to the system (IMO, anyway).  If our currency is being used around the world as a medium of exchange, the need for those assets is greater overall, because there's more GDP they need to support.

Regarding holding something that loses value as a store of value, it may not be as stupid as it seems initially.  Gold is one of the few things that doesn't deteriorate when simply trying to store it as value... but it never was (in a pre-fiat world) expected to gain REAL value over a long period.  There often was some level of storage costs if you didn't want the bank leveraging your gold and to just store it for you, so there was actually an implied negative real return for many people holding gold that didn't want it all in their home, but wanted to take near-zero risk.