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Author Topic: Macroeconomic Musing  (Read 2644 times)

GreatJustice

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Re: Macroeconomic Musing
« Reply #15 on: March 23, 2013, 08:43:39 am »

Doesn't that mean you'd end up with hundreds of different currencies, each with their own fluctuating values, places were they are and were they are not accepted, and all that trouble involving switching currencies. Though I suppose it might work better in a digital environement.

Either that or you'd end up with a monopoly and some minor currencies, I suppose.

There would be widely accepted currencies, many of which would be backed by the same things, and conversion would be about as complicated as using a credit card.
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Sheb

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Re: Macroeconomic Musing
« Reply #16 on: March 23, 2013, 08:49:20 am »

It would still add tremendous costs to business, as they need to jugle with many currencies, and insure themselves against the rate of change between them.

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Gervassen

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Re: Macroeconomic Musing
« Reply #17 on: March 23, 2013, 08:49:57 am »

Gervassen, as it has been pointed out, the Federal Reserve among other is currently "printing money", only in a way that increase overall debts levels since it's only lending, notably to the government. Doing the same, but giving that money to an investment fund rather than using it to pay government debt would result in the same rate of inflation, with lower debts levels. We are already avoiding what the Zimbabwean did, I don't see why we wouldn't if that money was free.

All paper money is free. I suppose the paper and ink costs a little, but it's all more-or-less free. You're treating money as synonymous with wealth, and wealth is the result of production. For a time, you can convince people that you have a certain reasonable ratio of "free money" to earned wealth, and convince them to exchange the one for the other at that rate, but these things are prone to cascading out-of-control at the darnedest moments.

For one thing, you apparently think money supply is directly related to inflation, but money velocity also matters. If we're making more money, and it's sitting unused under a mattress, then it appears to be not creating inflation because people are not circulating it and are not aware of exactly how much is actually out there.

QE as it pertains to the USA is not the buying of government debt. Currently, the Fed is buying mortgage-backed securities from banks, not financing the government debt directly. The banks are relieved of mostly junk private debt, and in gratitude, they invest indirectly in government bonds and the stock market, where the money sits largely unused and without really circulating much. But you've put that liquidity into the market and any market disturbance could shake that money out of the places where its quietly invested; people rush to spend it on physical things of real worth and value, rather than watching fake numbers go up in the markets, and that's when the cold reality of how much money supply you've actually got gets splashed in your face.

You assume that just because this hasn't gotten out of hand yet, there's no danger at all.

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So there is no way to actually cut the deficit without someone else taking up debts and/or the economy receding.

Government spending is only weakly correlated to economic growth. It hasn't done wonders for Japan during its two lost decades. You've assumed a priori that an economy depends on government spending, and then you conclude that running government deficits until you sink under interest payments is an unavoidable necessity.
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10ebbor10

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Re: Macroeconomic Musing
« Reply #18 on: March 23, 2013, 08:52:46 am »

I think Sheb's point was that the only way money can be entered into the market is by lending it from the Central bank*. Hence, debt needs to increase to add money.

*Which can create it out of nothing.
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GreatJustice

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Re: Macroeconomic Musing
« Reply #19 on: March 23, 2013, 08:56:41 am »

It would still add tremendous costs to business, as they need to jugle with many currencies, and insure themselves against the rate of change between them.

The boom and bust cycle, as well as the requirement to spend and make inordinate profits to overtake inflation, is a far higher cost of business than conversion costs.
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10ebbor10

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Re: Macroeconomic Musing
« Reply #20 on: March 23, 2013, 09:14:12 am »

I'm not entirely sure a private system would fix that, or would be as safe as you say it would be.

Currency fluctuating can be bankrupting for a bussiness, for example.
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Sheb

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Re: Macroeconomic Musing
« Reply #21 on: March 23, 2013, 09:36:34 am »

Except I'm not sure you've proven there wouldn't be boom and busts. People won't suddenly start being rational because the government ain't behind the money anymore. If anything I'd expect more of them (although of a more limited scope), as individual banks fail or derp. Just because you said "market!" doesn't mean we're all going to MLP land. Plus the current currencies are, by and large, stable. Even when Argentina got bankrupt, the pesos didn't suddenly loose all its value the way a bank money would if the bank filed bankruptcy. Also, I'm not convinced that we can drow parallel to an era before we ditched the gold standard.

Gervassen, 10ebbor10 got my point. I'm not assuming government spending is the main factor behind growth, but as 10ebbor10 said, someone has to be in debt. If it's not the state, it's the private sectors, and if it's neither we either got deflation (Because we have less money for less output) or a stagnating economy (because output is not moving).

Money isn't free. The Central Bank and other banks charge interest for it, and that's my beef actually. Money velocity is a good point, I totally forgot about it. Although of course there is no way that I know of influencing it. Do you?

Also, even if inflation is a risk, it's one that's easy to manage if you got an independent central bank. Just have the central banker sit next to a lever controlling the press, looking at the inflation gauge, and make him slow the thing down when inflation goes too high. It's pretty much what they did before the crisis with interest rates.
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mainiac

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Re: Macroeconomic Musing
« Reply #22 on: March 23, 2013, 09:57:34 am »

Government spending is only weakly correlated to economic growth. It hasn't done wonders for Japan during its two lost decades. You've assumed a priori that an economy depends on government spending, and then you conclude that running government deficits until you sink under interest payments is an unavoidable necessity.


First of all marvelous strawman.

Second of all: what reality do you inhabit?  I live in a reality where Japanese growth has been depressed by demographic decline for the last decade:
(Keep in mind that Japan actually outperformed us last decade if you look at working age population.)

So what we need to do is clear. Print money. Print money for as long as the inflation is low enough.

This idea had it's vogue back in the 1970s when Milton Freeman fleshed it out as an alternative to New Deal style intervention.  Ben Bernanke famously said in the 90s that Milton Freeman had been right and we could have ended the great depression at any time by just expanding the money supply.  He said this after a lot of work in the 90s on the Great Depression explored the deflationary aspects of teh gold standard during the Great Depressions downturns and a lot of contemporary work in Japan was looking at the depression they had in the 90s.

Since then economists have cooled on the idea a bit.  The ideological kneejerk brigade have replaced the actually work of Milton with an ideological god they worship.  But even the more academically rigourous ones have had misgivings about how easy it would be to suck money out of the economy after the recovery comes.  Just because the velocity of money is very low in your current setup doesn't mean that it will be low forever.  So the Fed has been very cautious because they want to make sure that they structure their purchases in a way that gives them an exit strategy.  Still I think many economists would say that the Fed has been too cautious.
« Last Edit: March 23, 2013, 10:02:05 am by mainiac »
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« Last Edit: February 10, 1988, 03:27:23 pm by UR MOM »
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Sheb

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Re: Macroeconomic Musing
« Reply #23 on: March 23, 2013, 10:00:45 am »

That's actually an interesting answer mainiac. Maybe the Fed could lend to the government at 0% interest rate, and the money supply could be contracted simply by paying that debt back. Probably account for that debt separately from the rest, so we can focus on the "real" one.
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mainiac

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Re: Macroeconomic Musing
« Reply #24 on: March 23, 2013, 10:05:02 am »

That's actually an interesting answer mainiac. Maybe the Fed could lend to the government at 0% interest rate, and the money supply could be contracted simply by paying that debt back. Probably account for that debt separately from the rest, so we can focus on the "real" one.

Just giving the money to the government to sit in the treasury accounts doesn't prompt a recovery.  You need to interact through the real economy through the investment spending or bond purchases.  So while that would let you wind things down easily, it wouldn't help the economy at all.

If you are talking about giving the government money so that it doesn't have to sell t-notes and that money goes to other investments, the Fed is already buying t-notes so this would be redundant.
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« Last Edit: February 10, 1988, 03:27:23 pm by UR MOM »
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10ebbor10

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Re: Macroeconomic Musing
« Reply #25 on: March 23, 2013, 10:31:20 am »

That's actually an interesting answer mainiac. Maybe the Fed could lend to the government at 0% interest rate, and the money supply could be contracted simply by paying that debt back. Probably account for that debt separately from the rest, so we can focus on the "real" one.
The ECB works in a similair way. Basically you got about 1500 banks which are allowed to bid on short term* repurchase agreements. By increasing or decreasing the amount of contracts, the amount of liquidity can be controlled with rather fast response times.

*3 weeks-2 months
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misko27

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Re: Macroeconomic Musing
« Reply #26 on: March 23, 2013, 11:12:28 am »

...


PTW.
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GreatJustice

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Re: Macroeconomic Musing
« Reply #27 on: March 23, 2013, 02:35:29 pm »

Except I'm not sure you've proven there wouldn't be boom and busts. People won't suddenly start being rational because the government ain't behind the money anymore. If anything I'd expect more of them (although of a more limited scope), as individual banks fail or derp. Just because you said "market!" doesn't mean we're all going to MLP land. Plus the current currencies are, by and large, stable. Even when Argentina got bankrupt, the pesos didn't suddenly loose all its value the way a bank money would if the bank filed bankruptcy. Also, I'm not convinced that we can drow parallel to an era before we ditched the gold standard.

Gervassen, 10ebbor10 got my point. I'm not assuming government spending is the main factor behind growth, but as 10ebbor10 said, someone has to be in debt. If it's not the state, it's the private sectors, and if it's neither we either got deflation (Because we have less money for less output) or a stagnating economy (because output is not moving).

Money isn't free. The Central Bank and other banks charge interest for it, and that's my beef actually. Money velocity is a good point, I totally forgot about it. Although of course there is no way that I know of influencing it. Do you?

Also, even if inflation is a risk, it's one that's easy to manage if you got an independent central bank. Just have the central banker sit next to a lever controlling the press, looking at the inflation gauge, and make him slow the thing down when inflation goes too high. It's pretty much what they did before the crisis with interest rates.

Money velocity is trivial to change, though I'll get to that in a bit. Anyhow, the advantage about "FREE MARKET MONEY" isn't that it will turn average people into superbeings incapable of screwing up, it's that the system is (A) far more decentralized and therefore less likely to fail all at once as with the present system and (B) because banks will be allowed to fail, the more efficient and reliable currencies would tend to last where the poor ones would be less common. Present currencies are "stable" in that the major central banks, in particular the BoJ, the Fed, the BoC and the ECB coordinate the rates at which they print money and help each other out to make sure the world financial system isn't destabilized. That stability is just as likely to last as the old housing bubble was.

Money is only debt under the present fiat currency system. In a system of free banking, money would be backed by a certain amount of something, say, gold. So the Trouserbank has x grams of gold, pegs Trouserbucks to be worth a certain amount of grams of gold, and then anyone who purchases Trouserbucks can redeem them for the set amount of gold. Thus, money is a commodity rather than debt, and that problem is solved entirely.

Now back to money velocity, there are two obvious tactics that can increase the rate at which money loaned by the central bank can return to the economy. The first is the "money from helicopters" method, where it's released to the general public directly rather than the banks. The obvious problem here is that this reduces the control of the central bank over where the money goes, so if the people spend it all immediately and create drastic inflation or bury it immediately, there's far less they can do. It also defeats one of the major purposes of inflation, which is to reduce real wages in times where the economy is slowing without having to actually cut nominal wages. In the 1930s, Keynes noticed that a lot of businesses didn't cut wages because the unions and workers were unwilling to take wage cuts, which in turn reduced the ability of these businesses to react to the depression and caused unemployment to rise. So Keynes' cleverly deduced that the government could simply inflate the money so that the workers get a small wage rise that also comes with a large increase in the cost of goods. In effect, the worker has been hoodwinked into taking a pay cut and the economy can carry on as normal, though this obviously doesn't work if the worker is the first one to get the money.

The other way is to put the screws on the excess reserves of the banks. See, the Fed released plenty of money into the banking industry under the expectation that the banks would go back to lending like they did in 2006. However, the banks instead kept their money in the vaults and collected guaranteed payments from the Fed (interest on excess reserves). So the money isn't generating inflation or growth at all, so while the monetary base has increased enormously, the money supply hasn't. The Fed could basically force the banks to release this money by reducing the interest on these excess reserves, taxing excess reserves, etc but this creates the opposite problem; the banks would immediately dump their FRNs and start buying assets at the same time, which would generate massive inflation. So Ben Bernanke is stuck between the rock of recession and the hard place of hyperinflation, and has basically been hoping that the markets will spontaneously recover without any drastic action, or with merely the threat of drastic action. There isn't any ideal solution under the present model, and the "best case scenario" comes down to kicking the can a bit farther.
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Reelya

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Re: Macroeconomic Musing
« Reply #28 on: March 24, 2013, 08:56:37 am »

It would still add tremendous costs to business, as they need to jugle with many currencies, and insure themselves against the rate of change between them.

Multiple types of money would probably boil down to a single type, and perhaps trading shares in portfolios back by mixes of currencies. I agree it wouldn't be a stable solution and would collapse to a single dominant currency. Hell, look at the dominance of products like Coca Cola, and colas are far more easy to change brand than changing money.

Effectively, we already have "multiple currencies" which are backed by many things. There are uncountable tradeable types of paper out there. I don't see how calling them "money" rather than shares or futures or commodities or derivatives, is going to change anything. There are a million things companies could theoretically exchange to signify value already, but they choose the national currency.
« Last Edit: March 24, 2013, 08:59:33 am by Reelya »
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Lagslayer

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Re: Macroeconomic Musing
« Reply #29 on: March 24, 2013, 09:12:28 am »

Posting to watch. Lots of delicious info and perspective in this thread.
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