Frank Rich, economist

by Russ Roberts on August 24, 2008

in Politics

After mentioning Michael Phelps’s success, Rich writes:

This was a rare feel-good moment for a depressed country. But the
unsettling subtext of the Olympics has been as resonant for Americans
as the Phelps triumph. You couldn’t watch NBC’s weeks of coverage
without feeling bombarded by an ascendant China whose superior cache of
gold medals and dazzling management of the Games became a proxy for its
spectacular commercial and cultural prowess in the new century. Even
before the Olympics began, a July CNN poll
found that 70 percent of Americans fear China’s economic might — about
as many as find America on the wrong track. Americans watching the
Olympics could not escape the reality that China in particular and Asia
in general will continue to outpace our country in growth while we
remain mired in stagnancy and debt (much of it held by China).

How
we dig out of this quagmire is the American story that Obama must tell.
It is not a story of endless conflicts abroad but a potentially
inspiring tale of serious economic, educational, energy and health-care
mobilization at home. We don’t have the time or resources to go off on
more quixotic military missions or to indulge in culture wars. (In
China, they’re too busy exploiting scientific advances for competitive
advantage to reopen settled debates about Darwin.) Americans must band
together for change before the new century leaves us completely behind.
The Obama campaign actually has plans, however imperfect or
provisional, to set us on that path; the McCain campaign offers only
disposable Band-Aids typified by the “drill now” mantra that even
McCain says will only have a “psychological” effect on gas prices.

Yes, China is growing quickly. Yes, they have mobilized a lot of resources to win gold medals in gymnastics and diving.

But they are a desperately poor country that represses their people too often, has filthy air, and has a massive problem dealing with an exploding urban population. Their mobilization of resources to win medals in gymnastics and diving is a scandal for such a poor country, not a triumph. Meanwhile, in the United States, we are suffering through a mild something, maybe a recession with unemployment at 5.7%. Our debt problem is minor. The fact that a lot of US debt has been purchased by the Chinese government that will be repaid in dollars that buy a lot less than they used to is tough on the Chinese not us.

The idea that Obama will have a plan to reverse matters and set us on the right track is simply a fantasy. We will continue to run trade deficits whether Obama or McCain is elected. We will almost certainly run Federal budget deficits under either man as well.

Finally, Chinese growth is good for the United States. The economic race is not like the Olympic race. It is not zero-sum. In the Olympics, if you win the gold medal, I can’t. In economics, both countries can grow together.

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Martin Brock August 24, 2008 at 12:43 pm

China's growth needn't come at the expense of U.S. growth, but no law of economics requires the U.S. to sell China reams of entitlement to U.S. tax revenue under the circumstances. These sales possibly cost the U.S. less as we inflate our way out of much of the obligation, but we won't inflate our way out of all of it.

But withdrawing from endless conflicts abroad is not simply a solution to ballooning deficits. It's an end in itself that will enrich the U.S. regardless of how the conflicts are financed. Selling entitlement to tax revenue to nominal "private property holders" to finance endless war is both fascistic and counterproductive. The policy has nothing at all to do with free market economics, and the "property" is "private" in name only. "We'll run deficits anyway" is no defense of the policy, and Congress spends the deficits is hardly inconsequential.

Bob Smith August 24, 2008 at 12:53 pm

Last I looked psychological effects on prices are just as real as economic ones.

Unit August 24, 2008 at 1:14 pm

The Obama campaign actually has plans, however imperfect or provisional, to set us on that path

Plans? Path? However destructive and counterproductive?

maximus August 24, 2008 at 1:25 pm

Unit
absolutely he has plans and paths. And now with Joe Biden to offer his mature statesman point of view, both will spend most of the campaign explaining the gaff said the day before. Foot in the mouth disease I believe they call it.

muirgeo August 24, 2008 at 1:32 pm

The presumption here, against all evidence, is that politicians and policy do not matter.

Joseph Stiglitz recent essay is so good at countering this idea I had a hard time editing it fro brevity. It should be read in it's entirety./a>

"Both the left and the right say they stand for economic growth.
..
There are, indeed, big differences in growth strategies, which make different outcomes highly likely. The first difference concerns how growth itself is conceived. Growth is not just a matter of increasing GDP. It must be sustainable….

Growth also must be inclusive;……America's recent growth was neither economically sustainable nor inclusive. Most Americans are worse off today than they were seven years ago.

But there need not be a trade-off between inequality and growth. Governments can enhance growth by increasing inclusiveness. A country's most valuable resource is its people. So it is essential to ensure that everyone can live up to their potential, which requires educational opportunities for all.

A modern economy also requires risk-taking. Individuals are more willing to take risks if there is a good safety net.

….

A second major difference between left and right concerns the role of the state in promoting development. The left understands that the government's role in providing infrastructure and education, developing technology, and even acting as an entrepreneur is vital. Government laid the foundations of the internet and the modern biotechnology revolutions. In the 19th century, research at America's government-supported universities provided the basis for the agricultural revolution. Government then brought these advances to millions of American farmers. Small business loans have been pivotal in creating not only new businesses, but whole new industries.

The final difference may seem odd: the left now understands markets, and the role that they can and should play in the economy. The right, especially in America, does not. The new right, typified by the Bush-Cheney administration, is really old corporatism in a new guise.

These are not libertarians. They believe in a strong state with robust executive powers, but one used in defense of established interests, with little attention to market principles.

By contrast, the new left is trying to make markets work. Unfettered markets do not operate well on their own – a conclusion reinforced by the current financial debacle. Defenders of markets sometimes admit that they do fail, even disastrously, but they claim that markets are "self-correcting." During the Great Depression, similar arguments were heard: the government need not do anything, because markets would restore the economy to full employment in the long run. But, as John Maynard Keynes famously put it, in the long run we are all dead.

Markets are not self-correcting in the relevant time frame.

The right often traces its intellectual parentage to Adam Smith, but while Smith recognised the power of markets, he also recognised their limits……

Joesph Stiglitz

Unit August 24, 2008 at 1:49 pm

It would be great if the left understood markets (and the right for that matter), but I don't see much evidence of that.

Unit August 24, 2008 at 2:42 pm

"During the Great Depression, similar arguments were heard: the government need not do anything, because markets would restore the economy to full employment in the long run"

Maybe those arguments were made but the fact is that politicians did not let things alone. Both Hoover and Roosevelt threw the kitchen sink and then some against the market…and the initial stock market shock was prolonged for more than a decade.

Unit August 24, 2008 at 2:48 pm

Warning to other commenter: Muirgeo edited Stiglitz before posting. For example this is one of the original paragraphs:

A modern economy also requires risk-taking. Individuals are more willing to take risks if there is a good safety net. If not, citizens may demand protection from foreign competition. Social protection is more efficient than protectionism.

Crusader August 24, 2008 at 2:55 pm

You know, I don't want to hear anything more from Stiglitz. He's a unrepentant Communist and he has nothing useful to say on free-market economics AFAIK. He's a non-entity. Less then zero.

Crusader August 24, 2008 at 2:59 pm

BTW, I have yet to be convinced how business will boom if we increase the payments to the parasitic classes(welfare, food stamps, etc..). IT seems utterly nonsensical. But when did Communists ever make sense?

Christopher August 24, 2008 at 3:04 pm

"Our debt problem is minor."

Russell, I have a hard time believing that.

Maybe David Walker is wrong, but he makes a strong case.

"Things that can't go on forever, don't."

And Frank Rich is a piece of work. I am not worried about China. China has plenty of problems of their own and I don't see that Government staying in power for more than a couple more decades.

They also have a structural demographic problem, the "4-2-1 problem" that stems from the one child policy. It will eventually cripple them.

I think we have nothing to fear from China.

Jonathan Bydlak August 24, 2008 at 5:25 pm

"Meanwhile, in the United States, we are suffering through a mild something, maybe a recession with unemployment at 5.7%. Our debt problem is minor. The fact that a lot of US debt has been purchased by the Chinese government that will be repaid in dollars that buy a lot less than they used to is tough on the Chinese not us."

This is a great post, but I disagree strongly with the above statement. While it's true that we can "inflate" away our debt, and thereby reduce the value of assets held by the Chinese, it is not true — as Russ seems to be implying — that we can "get something for nothing."

We have two options. First, we can maintain a strong-dollar policy, and be forced to pay face value for decades of accrued debt. We also, as Russ hints at, have the option of inflating away our debt. But if we choose option 2, we also choose to harm the majority of Americans who have their savings stashed away in dollars. Inflating may decrease our debt burden, but it also diminishes our purchasing power vis-a-vis the rest of the world. That means no more cheap products at Walmart and the like, because the cost of Chinese labor will rise (nominally) relative to American labor.

The net result of our over-spending, whether we inflate or not, is that (ceteris paribus) most Americans will become poorer. So long as we continue interest rate policies (and fiscal policies such as tax rebates) that encourage Americans to consume rather than save, the relatively minor downturn that we are currently experiencing only serves as evidence that we will endure a bigger market correction in the future.

Unit August 24, 2008 at 5:52 pm

I never understood those who speak of strong dollar policies and devaluing the dollar etc…Can the US gov't really decide how strong and how weak the dollar is going to be? If so, how would it go about doing that?

libfree August 24, 2008 at 6:29 pm

I like the part about not having time to fight culture wars. China isn't debating Darwinism.

Now, as much as I am a fan of evolution (in theory not necessarily in practice. Damn evolving drug resistant bacteria);but, isn't the fact that we have these debates and do them bloodlessly, what makes this country great? Last I heard, they don't debate anything in China. That's when you disappear.

Jonathan Bydlak August 24, 2008 at 6:36 pm

Unit,

When government spends, they need to have money to pay for that. If it doesn't raise enough in taxes, then the government has little choice but to borrow or print money. But printing money (that is, expanding the money supply) naturally decreases the value of the currency (via the law of demand, the more you have of something, all else equal, the less it's worth).

But it's also important to remember that "printing money" or "expansion of the money supply" typically takes the form of lowered interest rates by the central bank. Lower interest rates, however, encourage investors to seek profit elsewhere, decreasing demand — and value — for the dollar. This is the theory that's typically referred to as "purchasing power parity."

So, increasing the money supply indefinitely debases the currency over time, while also encouraging consumption, per my previous post. In my view, a "strong" dollar isn't important per se, but what does matter is that the currency's value changes due to "real" forces, rather than government largesse.

muirgeo August 24, 2008 at 7:46 pm

Unit,

Also every-time you go fill your tank up you can thanks the Fed as well because that's the elephant in the room of how a weak dollar hurts you.

Debasing our currency has been great for multinational corporations and Bankers but not for Main-street. And that's why I suggest the Fed/Finance/Wall Street policy has been a massive transfer of wealth.

Martin Brock August 24, 2008 at 7:52 pm

But if we choose option 2, we also choose to harm the majority of Americans who have their savings stashed away in dollars.

General inflation only harms people this way if they literally save dollars, like stuffing currency in a mattress or something. For people accumulating real capital, inflation doesn't pose this problem. Excessive inflation can pose other problems.

That means no more cheap products at Walmart and the like, because the cost of Chinese labor will rise (nominally) relative to American labor.

This rise is bound to happen anyway and should happen. If we really consume a lot of cheap Chinese labor, this rise could push up prices broadly here, but the rise is not inflation in the usual sense. It's not a strictly monetary phenomenon. It's the growing power of Chinese labor to demand higher consumption themselves, and we should welcome it.

The inflation we should fear is a matter of loose credit here, including the trillions we're throwing at the warfare state without producing anything very valuable for anyone to consume. Financing this profligate spending by selling entitlement to tax revenue compounds the problem.

When we extend credit to an enterprise that never produces anything of comparable value, creditors ideally lose entitlement to consume in turn, so we aren't simply generating entitlement to consume without producing. If the enterprise is successfully productive, it returns entitlement to consume to the creditors.

When we extend credit to the state, productivity is completely irrelevant. Far from producing anything for others to consume, the state may even use the credit to destroy wealth, as the warfare state routinely does. Yet even after destroying all of this wealth, never mind producing anything, the state's creditors still hold entitlement to consume what was never produced, and the state can only realize this entitlement either with transfer payments, by raising taxes and distributing the revenue to holders of Treasury securities, or with inflation, by simply printing money to pay its creditors.

The net result of our over-spending, whether we inflate or not, is that (ceteris paribus) most Americans will become poorer.

Yes, but this doesn't happen because the cost of Chinese labor rises. It happens because the Chinese extend us credit, with money they receive as we consume their produce, and we don't use the credit to produce anything of a value comparable to what we're consuming. We instead use it to destroy wealth in Iraq in order to create a fleeting illusion that George W. Bush rules the world, though of course, he doesn't remotely.

And the people who become poorer aren't simply the savers, because these people accumulate assets of real value that may inflate along with everything else. The people who become poorer can be laborers whose wages don't keep up with the inflation.

Don Boudreaux August 24, 2008 at 8:33 pm

Muirgeo,

Can you please explain what you mean when you assert that currency debasement "has been great for multinational corporations." I know of no empirical evidence nor theory that supports this claim.

It's true that ANYONE who is subsidized is benefited — even if the subsidies come from newly created (i.e., debased) money. But debasement of the currency in and of itself does not help "multinational corporation" (or even "national" or "regional" or "nano-local" corporations).

You should do less asserting and more analysis.

Unit August 24, 2008 at 8:34 pm

But I thought the Fed had the same policy of targeting inflation for the last 25 years, while the dollar as weakened only recently.

Russ Roberts August 24, 2008 at 8:37 pm

Christopher,

I didn't mean to imply that we are getting something for nothing. I also don't think we're going to deliberately run high rates of inflation to debase the value of our debt. But there is inflation and it appears to be rising. That means whether it is intended or not, that the Chinese are going to get less back than they expected (unless they anticipated the higher rate of inflation).

My only point is that borrowing money from the Chinese (and lots of others) to pay for federal government spending does not put the US on the edge of a precipice or give China some kind of edge over the United States.

Jonathan Bydlak August 24, 2008 at 9:11 pm

Russ,

I'm assuming that you meant to respond to me with your post… "Christopher" wrote the post ahead of me.

Thanks for the clarification. I would just add, though, that the validity of your final statement depends on your definition of "precipice." I agree that China does not have some kind of "edge" over the U.S., but that is simply because of the benefits to the debtor nation of having a printing press. Were I to owe you money, and you held legal claims, you would hold quite the edge over me.

That's why I took umbrage with your original statement. If we don't inflate away our debt, then how can our debt not be a big deal?

Moreover, you may not think higher inflation qualifies as the edge of a precipice, and maybe you're right that some catastrophe won't happen overnight. But we'll pay for this gross spending sure enough, and that does mean that federal government spending hurts U.S. citizens — a lot.

Jonathan Bydlak August 24, 2008 at 9:23 pm

Don,

While I'm a little hesitant to rush to Muirgeo's defense, I do feel there's some truth to his statement that:

"Debasing our currency has been great for multinational corporations and Bankers but not for Main-street. And that's why I suggest the Fed/Finance/Wall Street policy has been a massive transfer of wealth."

I don't agree so much with the "multinationals" part as that of Wall Street. A flood of money helps investment firms and banks because they are the first to use the money, as money floods into (mal)investments.

More money means more demand for investment products, which in turn means larger bonuses for the financial sector.

Or, as a friend put it, Wall Street firms benefit from volume, and once their bonuses are paid, they could care less what happens, because it's the actual stakeholders who lose from malinvestment.

Do you not see this as a legitimate explanation of the recent trend of financial bonuses at investment banks and other financial services firms?

Jonathan Bydlak August 24, 2008 at 9:44 pm

1. General inflation only harms people this way if they literally save dollars, like stuffing currency in a mattress or something. For people accumulating real capital, inflation doesn't pose this problem. Excessive inflation can pose other problems.

Yes, but most middle-class individuals today are not earning massive rates of interest that are outstripping the rate of inflation. I would not argue that much of today’s middle class are “accumulating real capital.” The general point I wished to make is that inflation harms the middle class the most, but you’re right that it’s more that just savings. I didn’t touch on, for example, “stickiness” of wages in our moderately regulated labor market.

2. This rise is bound to happen anyway and should happen. If we really consume a lot of cheap Chinese labor, this rise could push up prices broadly here, but the rise is not inflation in the usual sense.

Sure, but do you know when it “should” happen? Yes, our high demand will cause Chinese wages to increase, but that doesn’t mean that it somehow makes poor Federal Reserve policy OK because it would happen anyway. To me, his argument’s no different than a murderer who says “it doesn’t really matter that I killed him because his death was ‘bound to happen anyway.’”

3. I agree almost entirely with all your statements regarding our misadventures and unnecessary expenditures overseas – as most good libertarians and Americans and should.

4. Yes, but this doesn't happen because the cost of Chinese labor rises. It happens because the Chinese extend us credit, with money they receive as we consume their produce, and we don't use the credit to produce anything of a value comparable to what we're consuming.

Well, actually, it’s both. When the cost of Chinese labor rises, this increases the cost of goods to us. Now, sure, this also means that Chinese workers can buy more stuff – possibly from U.S. firms. But that’s not obvious… while free trade certainly helps the world as a whole, it’s not clear that the U.S. would be better off from a rise in Chinese wages.

Oil Shock August 25, 2008 at 2:05 am

Hi Jonathan,

Are you the same Jonathan Bydlak who managed the Ron Paul campaign?

andy August 25, 2008 at 4:40 am

3rd world countries are characterized by:
- low income
- low wealth
- low productivity

Currently the trend in the US is:
- the recession causes people to sell the wealth they have
- the inflation lowers the income of most people
- selling the assets abroad moves the income derived from capital out of US

On the other hand the productivity of the US probably remains much higher then the productivity of the Chinese because much of the capital is in the education of the people and in the machinery that cannot be easily moved from one country to another.

Unless the government tries to 'help' the economy and inadverently causes the real capital to flee the economy and new capital to stop coming in. Which may happen compared to China – if you didn't find it yet, China is in many areas more capitalistic then the USA.

Martin Brock August 25, 2008 at 5:12 am

Yes, but most middle-class individuals today are not earning massive rates of interest that are outstripping the rate of inflation.

Money in a bank account (or a CD or a T-Bill) is not what I call "real capital" anyway. If you're receiving enough interest on money to offset inflation this way, you're probably part of the inflationary problem rather than the solution, because the Federal Government (including the Federal Reserve) provides much of this interest by creating money from nothing.

I would not argue that much of today’s middle class are “accumulating real capital.”

Middle class individuals own houses that rise in price with inflation. In fact, house prices typically lead the inflationary spiral. Prices have fallen recently, but that's beside the point. My house is still nominally worth 30% more than it was 10-15 years ago, and it might have depreciated over the decade instead. In real terms, it possibly has depreciated. It is a decade older after all.

The general point I wished to make is that inflation harms the middle class the most, but you’re right that it’s more that just savings. I didn’t touch on, for example, “stickiness” of wages in our moderately regulated labor market.

I agree that excessive inflation is a problem, particularly when state bondage generates it. Money is entitlement to consume. Inflation is everywhere and always a growing entitlement to consume without producing.

Sure, but do you know when it “should” happen?

The sooner the better.

Yes, our high demand will cause Chinese wages to increase, but that doesn’t mean that it somehow makes poor Federal Reserve policy OK because it would happen anyway.

Chinese wages can rise relative to ours if their bargaining power rises relative to ours. That's probably happening, but we don't want too much of this rise. We want Chinese bargaining power on parity with ours as soon as possible, because we don't want the looming risk of a sudden rise. Increasing Chinese productivity also raises Chinese wages, and we want as much of this rise as possible.

I agree that poor Federal policy (and not only central bank policy) is responsible for potentially harmful inflation, but many people in the "middle class" benefit from it, like all those baby boomers with taxpayer (and Fed) subsidized pensions. If your pension fund holds many Treasury securities, it's Federally subsidized. We'll never get a handle on inflation until we acknowledge its sources.

Now, sure, this also means that Chinese workers can buy more stuff – possibly from U.S. firms. But that’s not obvious…

Not obvious at all. They're now buying lots of U.S. Treasury securities, not least because they have an aging population problem dwarfing ours, even though the problem reaches a critical point a few years further out. We're selling these securities hand over fist, and that's our problem, not theirs. If we can't later generate correspondingly more food for their aging population, or whatever they want from us, our prices can rise.

… while free trade certainly helps the world as a whole, it’s not clear that the U.S. would be better off from a rise in Chinese wages.

The U.S. is better off from a rise in Chinese productivity, and this rise is occurring. We're worse off from depressed Chinese wages, because depressed wages can rise quickly. A rapid rise can lower our rate of consumption only because the current rate is inflated insofar as Chinese wages are depressed.

Jonathan Bydlak August 25, 2008 at 9:47 am

Oil shock,

haha… I knew I shouldn't have used my real name!

Just kidding, but yes, I was involved in the campaign — the director of fundraising though, not campaign manager.

Charlie August 25, 2008 at 12:02 pm

I think Russ misses the whole point of the article. If you go read the whole thing, it is about winning a political campaign. That is, whether or not it is right to "fear China's economic might" most Americans do. (I find this to be true in my informal sampling as well. It certainly doesn't help that the military routinely stirs up China fears for their meal ticket as well.)

Earlier any the article he references Leonhart's article that called Obama a "U of Chicago Democrat" and quoted Cass Sunstein. Leonhart said (quoting Rich) "Obama’s real problem is not a lack of detail but his inability to sell policy with “an effective story.”" So in Russ's quote, this is what he is alluding to when he says "this is the story Obama must tell."

I find it quite unclear from the article whether or not Rich is fearful of China's economic growth. I don't see why Russ draws that conclusion.

David Peterson August 25, 2008 at 4:35 pm

It's funny when you go back and watch 80s movies where they're convinced that Japan will overtake the US by 2000 and it really never happened. I think it was a lot of the same too, Japan pushed for short term growth, but those policies were not sustainable in the long term. I think something similar will happen in China.

vidyohs August 25, 2008 at 6:12 pm

Only an idiot could read these words and not realize he is reading the words of an even more complete idiot.

"But there need not be a trade-off between inequality and growth. Governments can enhance growth by increasing inclusiveness. A country's most valuable resource is its people. So it is essential to ensure that everyone can live up to their potential, which requires educational opportunities for all."

How is it possible to "ensure" that everyone lives up to their potential? Or how is it possible to say that that is not what was happening in presocialist USA? And, oh my God, educational opportunities for all…..like maybe public school grades 1 through 12?

"A modern economy also requires risk-taking. Individuals are more willing to take risks if there is a good safety net. If not, citizens may demand protection from foreign competition. Social protection is more efficient than protectionism."

How stupid is it to say that people will take risks if they know that there is a safety net? With a safety net, there is no risk. Which is exactly why the demand protection from any competition if they can get it.

"Failures to promote social solidarity can have other costs, not the least of which are the social and private expenditures required to protect property and incarcerate criminals. It is estimated that within a few years, America will have more people working in the security business than in education. A year in prison can cost more than a year at Harvard. The cost of incarcerating two million Americans – one of the highest per capita rates (pdf) in the world – should be viewed as a subtraction from GDP, yet it is added on."

Oh yeah, let's promote social solidarity. Let's pass equal rights laws and eliminate all legal blockades to natural rights…..then let's pass more laws that give some people access to "afrimative action" and create a new inequality….all in the name of social solidarity.

muirduck is an idiot and Joe Stiglitz is a more complete idiot. I guess if muirduck stays with the church long enough he will be promoted to socialist priest like Stiglitz.

Our prisons are full because too many people are willing to be thumbsuckers because of the unceasing socialist proseltyzing since the industrial revolution. Why work when the sugar tit is there for everyone. If the sugar tit runs dry, hey steal enough to get by, socialist courts and left wing judges will slap your wrists and you'll at least get three squares while you're in the joint.

Virtually all social problems in this nation can be connected directly to the corruption and degeneration caused by the socialist religion and its evangelicals.

Oil Shock August 25, 2008 at 8:27 pm

A country's most valuable resource is its people.

You need to stop seeing people as resources and start seeing them as individuals. Human beings are not like Oil or Copper or Sheep. Central planning the optimization of human productivity is what a fascist would do.

Oil Shock August 25, 2008 at 8:29 pm

Jonathan,

I heard that you quit a lucrative career on Wallstreet to get involved in the political campaign of Ron Paul. Is that true? Why did you do it?

Methinks August 25, 2008 at 8:46 pm

because these people accumulate assets of real value that may inflate along with everything else. – Martin

That may be true of a house or of commodities, but it may not be true of other assets with "real value" such as stocks or bonds.

Money in a bank account (or a CD or a T-Bill) is not what I call "real capital" anyway – Martin

I'll give you T-bills (we agree that treasury issues are merely a tax), but why aren't other short term investments "real capital"? The bread and butter of banking business is borrowing at the short end of the curve and lending at the long end. Without short term borrowing, what will banks lend for people to buy houses and finance business ventures?

I generally agree with what you're saying. However, the amount we throw at the "warfare state" pales in comparison to how much we throw at the welfare state and how much that spending is forecast to grow relative to defense spending. I understand you don't approve of the Iraq war and other entanglements, but you needn't blow it out of proportion to make your point. The last time I checked, we were still the most productive country, so I don't know why you think that we're not producing anything anyone wants to consume. Although, the housing subsidies that government keeps dreaming up (as one example: removing capital gains tax entirely from housing but not from other investments) have played a role in the inefficient allocation of assets known as the recent housing bubble.

Methinks August 25, 2008 at 8:47 pm

Closing tag. Sorry.

Methinks August 25, 2008 at 9:23 pm

More money means more demand for investment products, which in turn means larger bonuses for the financial sector.

Or, as a friend put it, Wall Street firms benefit from volume, and once their bonuses are paid, they could care less what happens, because it's the actual stakeholders who lose from malinvestment.

Do you not see this as a legitimate explanation of the recent trend of financial bonuses at investment banks and other financial services firms?

Jonathan,

There's a lot of truth to that. It's the trader's option – the incentive to sell far out of the money options. You collect your premium most of the time, until you run into the one time when you blow up (then you go launch a $6 billion hedge fund and proceed to lose that too).

This is blow up time. A colleague at an I-Bank which I won't name but is famously desperately seeking a buyer, lost ten years of compensation as the firm's stock tanked over the past year. Recently, more and more (sometimes a majority) of Wall Street compensation is not cash but stock in the company for which you work and it's deferred, vesting over a period of years. This has been the trend over the past 5-10 years. Much of the compensation comes in the stock of the company they work for. This can also be true for the portfolio managers of hedge funds.

The papers reported 2007 as a record Wall Street bonus year. What they didn't report is that a very large percentage of those bonuses were rescinded. CDO departments largely didn't pay bonuses at all (and fired employees) and a lot of employees received as little as 10% of their expected compensation if any bonus at all. Base salaries usually range from $100K to $200K in a city where we have the highest tax rates in the country and the average apartment sells for over $1.5 million and is tiny compared to anything outside the city.

Hubris and degenerate gambling are still large problems on Wall Street and always will be, but steps have been made to align risk and reward for Wall Streeters. They can no longer receive the bonus and not care what happens next.

John Dewey August 26, 2008 at 5:37 am

David Peterson,

I'm not sure what you are meaning. Are you saying that China will never "overtake" the U.S.? What does that mean?

If Chinese per capita GDP ever reached the level of U.S. per capita GDP, that would be a wonderful miracle for the entire world. Of course, China has a population 4 times the size of the U.S., so its GDP would then be 4 times that of the U.S. How would that be a bad thing?

If the GDP per capita of every nation equaled that of the U.S., just think how many research scientists and inventors and entrepreneurs could be employed solving mankind's problems. We can only dream about how much better the world would be if China did "overtake" the U.S. Or if India did as well.

We do not live in a zero sum world. We do not lose when other nations progress economically. In fact, every developed nation will benefit from the economic progress of developing nations. Unless, of course, the U.S. protectionists who are damned determined to hurt U.S. consumers get their way.

Martin Brock August 26, 2008 at 6:01 am

That may be true of a house or of commodities, but it may not be true of other assets with "real value" such as stocks or bonds.

Using "real value" in a technical sense, it's practically true by definition. If your asset doesn't hold its value, relative to other things, as prices generally rise, then the value isn't "real". It's only "nominal".

Often, when people cry for government to "stop inflation", they're really crying for government to guarantee them a real yield, but the real value of an asset can depreciate and typically does. If you don't want money losing value in a bank account, take a risk and hold something else. No state policy creates this necessity, and no state policy should try to prevent it.

I'll give you T-bills (we agree that treasury issues are merely a tax), but why aren't other short term investments "real capital"?

I included CDs, because banks often back CDs with Treasury securities, but a CD can be related to real credit.

If you extend credit to organize resources productively, and if the productive organization repays the credit from value added in a free market, that's real "capital", but this capital is always risky. Real capital offers no guaranteed yield or even a minimum yield. You may lose all or part of your investment, precisely because the market is free.

Nominal "capitalists" often are the greatest enemies of a free market for this reason. The Bushniks illustrate this point resoundingly. They adore the state. They want nothing more than reams of new Treasury notes. They don't sell notes to wage war. They wage war to sell notes. Selling entitlement to tax revenue is an end in itself.

The bread and butter of banking business is borrowing at the short end of the curve and lending at the long end.

In a fractional reserve system, banks accept deposits only to maintain an entitlement to extend monetary credit that is a multiple of deposits held. They don't accept deposits to lend them. The deposits only play a regulatory role in the system. Banks routinely extend credit far exceeding their deposits.

Without short term borrowing, what will banks lend for people to buy houses and finance business ventures?

Short term borrowing isn't necessary to extend credit, and most long term credit is not borrowed short term. It isn't "borrowed" at all in a literal sense. You walk into my store and walk out with a widget worth $100, but you don't leave me with $100, because I agree to accept ten dollars per week for ten weeks instead. That's credit. I accept your credit in lieu of immediate payment, because I expect you to pay me from value that possibly doesn't exist at all at the time of the transaction, value you produce only later.

"Borrowing" is something else really. This word suggests that I take possession of something of real value today and exchange it for your widget today. That's just not what happens when I "borrow" money from a bank to make the purchase, not necessarily anyway. Monetary authorities can and routinely do simply create this money from nothing. Only my future productivity secures the "loan". The only real capital involved is my own future labor or the future value of other assets I possess.

Adrian Chiew August 26, 2008 at 6:54 am

The popularity of the US vs China theme seems so reminiscent of the US vs Japan theme of the 1980s. There seems to be a myth that Chinese economic growth will continue forever until they eclipse the US, just as it was expected Japan would. As China gets richer they too will face the same economic problems as developed countries.

China is catching up fast to the size of the economy of the US, EU and Japan, but the closer they get the harder it will be to maintain that growth.

The real reason behind the successful economic growth of China isn't their government's superior economic policy to the US government. It's because they're coming from such a low base, that means achieving high economic growth is far easier.

Martin Brock August 26, 2008 at 10:22 am

The analogy to Japan is highly debatable. Japan has half the U.S. population on an island the size of California. China has five times the U.S. population in a region the size of the U.S.

Methinks August 26, 2008 at 11:49 am

Often, when people cry for government to "stop inflation", they're really crying for government to guarantee them a real yield, but the real value of an asset can depreciate and typically does.
Or it's a cry to stop printing money like the Weimar Republic. The real value of assets can appreciate or depreciate. There is no such thing as "typical" when talking about a broad spectrum of all possible assets.

Real capital offers no guaranteed yield or even a minimum yield. You may lose all or part of your investment, precisely because the market is free.

CD's are FDIC insured like deposits. The reason they earn a slightly higher interest rate is to compensate the lender for the lock-up (deposits have no lock-up, of course). FDIC creates distortions in the risk, but even with FDIC, the CD holder risks the opportunity cost of rising interest rates. If interest rates rise during the lock-up, the CD holder will lose the difference between the current interest rate and the one he is receiving for his CD. This represents a real loss of value.

In a fractional reserve system, banks accept deposits only to maintain an entitlement to extend monetary credit that is a multiple of deposits held. They don't accept deposits to lend them. The deposits only play a regulatory role in the system. Banks routinely extend credit far exceeding their deposits.

Banks do accept deposits to lend them. The fact that banks leverage their loans doesn't change that.

Short term borrowing isn't necessary to extend credit, and most long term credit is not borrowed short term. It isn't "borrowed" at all in a literal sense. You walk into my store and walk out with a widget worth $100, but you don't leave me with $100, because I agree to accept ten dollars per week for ten weeks instead.

And how did you pay for the widget you're now selling to me on credit? Incidentally, are you really going to lend me the $100 for 10 weeks at a zero interest rate or is the interest rate built into the price already? I have borrowed the $100 from you in a very literal sense and the only thing backing that loan is my future production and the widget.

Banks do borrow at the short end of the curve and lend at the long end. This is otherwise known as the "carry" or "curve" trade and "works" because most of the time the interest rate curve is upward sloping. Borrowing is cheaper than raising equity, so the margin is much higher. Of course, so is the risk of so much leverage – which is why it's particularly unwise to loosen lending standards as much as they were loosened in the past few years.

"Borrowing" is something else really. This word suggests that I take possession of something of real value today and exchange it for your widget today.

No, I'm borrowing from you to buy the widget. I'm taking possession of your widget today (which has value) and I'm paying your for the widget over time. If I had paid you the $100 today, you could have reinvested it in inventory, or put it toward other productive use. Your opportunity cost of lending me the $100 has real value to you. The only difference in your widget scenario and what you describe as "borrowing" is who is doing the lending. Otherwise, they are exactly the same.

That's just not what happens when I "borrow" money from a bank to make the purchase, not necessarily anyway. Monetary authorities can and routinely do simply create this money from nothing. Only my future productivity secures the "loan". The only real capital involved is my own future labor or the future value of other assets I possess.

True enough. There's nothing to stop government from printing money. However, you simply can't say this is what happens routinely. If it did, our inflation rate would start to rival Zimbabwe's. This is starting to smell of the gold standard argument. Is this where you're going?

John Dewey August 26, 2008 at 12:36 pm

Martin Brock: "The analogy to Japan is highly debatable."

Why? We were talking about how fear of China's economic growth today makes no more sense than did fear of Japan's economic growth 20 years ago.

Martin Brock: "China has five times the U.S. population in a region the size of the U.S."

So what are you saying, Martin? That China's economic advance is a threat because its population is five times that of the U.S. If so, please explain how China joining the ranks of the developed nations would be a threat to the U.S.

I've staked out my position in post from earlier this morning. Do you disagree with it?

Not meaning to be nitpicky, but the population of China is 4.38 times the U.S. population of 301 million.

floccina August 26, 2008 at 2:08 pm

Frank rich is hilarious.

…That was meant as comedy wasn’t it?

…Please tell me that it was satire, please.

…Was this for the John Stewart show, or maybe the Cobert report?

…No!

…This guy gets published in the NY Times! Maybe things are worse than I thought.

Martin Brock August 26, 2008 at 2:13 pm

So what are you saying, Martin?

I'm saying the analogy is debatable because Japan has half the U.S. population on an island the size of California while China has four and a half times the U.S. population in a region the size of the U.S.

So what are you saying, Martin? That China's economic advance is a threat because its population is five times that of the U.S.

The answer depends on who you are and what you consider threatening. The problem, if any exists, is not China's advancing productivity. In the U.S. civil war, freer labor in the North objected to competition with slave labor in the South, with some justification. Also, globalization is not exclusively, or even primarily, about freer trade. International patents, for example, do not constitute freer trade. They are global, forcible monopolies.

Do you disagree with it?

I haven't read your post. I'll say more later.

floccina August 26, 2008 at 3:11 pm

muirgeo Joseph Stiglitz may be right but that does not say that China has better prospects going forward than the USA does. I am sure that Joseph Stiglitz is no fan of China's government or of China's olympic program.

floccina August 26, 2008 at 3:38 pm

The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary.
H. L. Mencken

Frank Rich has a hobgoblin that he is trying to build.

John Dewey August 26, 2008 at 5:33 pm

Martin Brock: "I'm saying the analogy is debatable because Japan has half the U.S. population on an island the size of California while China has four and a half times the U.S. population in a region the size of the U.S."

Sorry, Martin, but reading that statement one more time doesn't help me understand why the analogy is not valid.

Adrian Chiew related the 1980's fear of Japan to the current fear of China. You claim that analogy is debatable, but only offer some reference to the differences in size of the populations. Why does the population make any difference?

Some 1980's protectionists were fearful of Japan's economic growth. Some current protectionists are fearful of China's economic growth. What's debatable about that?

Please don't repeat the sentence about China's population being so much larger without some explanation as to why that's relevant to Adrian's point.

Martin Brock August 26, 2008 at 7:17 pm

Sorry, Martin, but reading that statement one more time doesn't help me understand why the analogy is not valid.

"Not valid" is your description. Mine was "highly debatable" The analogy is debatable, because China's economy is potentially much, much larger than Japan's. I don't know how to make such an obvious point except simply to state it. You think this difference between Japan and China is irrelevant?

China with the same per capita productivity as Japan produces ten times a much. China with the same per acre productivity produces twenty-five times as much. These measures are crude, but I only suppose that, with a similar rule of law, China easily could be a far larger economy than Japan. Ignoring such an obvious distinction is obtuse.

I'll say more later. Be patient. I don't oppose trade with China. If it were up to me, there would be far fewer restraints on trade with China, including fewer restraints the purchase of goods allegedly infringing intellectual property claimed within the U.S. and fewer restraints on Chinese labor within the U.S. (fewer restraints on immigration).

Martin Brock August 26, 2008 at 8:04 pm

CD's are FDIC insured like deposits. The reason they earn a slightly higher interest rate is to compensate the lender for the lock-up (deposits have no lock-up, of course). FDIC creates distortions in the risk, but even with FDIC, the CD holder risks the opportunity cost of rising interest rates.

But he doesn't risk loss of the deposit. He suffers no nominal risk at all, i.e. he knows precisely the numeric value of his return with practical certainty. That's the whole point. Only a statutory system can promise this certainty. These nominally riskless investments are not free market capitalism.

If interest rates rise during the lock-up, the CD holder will lose the difference between the current interest rate and the one he is receiving for his CD.

Why would the nominally riskless interest rate for a term less than six month rise? The Fed effectively regulates this rate through open market operations, so the rate rises at the Fed's command. It's true that you don't now what the Fed will do, but your uncertainty doesn't imply a free market. No one knew what Mussolini or Stalin would do either.

Or it's a cry to stop printing money like the Weimar Republic.

It can be that too.

The real value of assets can appreciate or depreciate.

Real assets can appreciate, but money is an accounting device rather than a real asset. It accounts for the holder's entitlement to consume. When you hold money, you're playing an entitlement game with monetary authorities, and this game is like the market only insofar as monetary authorities construct the game this way.

This represents a real loss of value.

It's a real loss of entitlement to consume, compared with the entitlement that might be earned otherwise. All games have rules, but calling this game "free market capitalism" is an Orwellian abuse of the language. In free market capitalism, a player holds real assets for their productive utility, not documentary evidence of some central authority's guarantee of a nominal yield.

Banks do accept deposits to lend them. The fact that banks leverage their loans doesn't change that.

If the reserve ratio is 10-1, a bank with only one dollar on deposit may lend nine dollars. It may not lend ten dollars, only nine. That the bank nominally "borrows" the other nine dollars from the rest of the banking system, including the central bank, hardly matters. The central bank ultimately creates all of these dollars in order to lend them, hopefully secured by real assets and a real demand for credit, and the central bank essentially destroys the dollars as member banks repay its loans.

In principle, individual banks could do the same without a central bank. The central bank is only a regulatory authority presumably preventing individual banks from creating money excessively by setting reserve requirements among other things. If the gold nuts only understood this fact, I'd have less of a problem with a gold standard, but a gold standard does not avoid fractional reserve banking. It only fixes the price of gold.

If I deposit a dollar in a bank, does the bank ever lend my dollar specifically? All dollars are interchangable, so this question is meaningless; however, with a reserve requirement, a bank must hold some dollar in reserve to satisfy depositors including me. We might as well say that the bank never lends my dollar but only holds it to maintain an entitlement to lend other dollars. This formulation of the entitlement is equivalent.

And how did you pay for the widget you're now selling to me on credit?

Maybe I made the widget myself. Does it matter? The point is that I own the widget before I transfer it to you with only an expectation of payment over time. This is credit. Credit doesn't require you to borrow money from me or anyone else before the transaction. It only requires me to obtain money after the transaction. I understand your objection to this formulation, but the objection is only semantic.

Incidentally, are you really going to lend me the $100 for 10 weeks at a zero interest rate or is the interest rate built into the price already?

The interest is not relevant to my point. I'm happy to charge you ten dollars and dime weekly for ten weeks. The dime compensates me for the risk that you'll not pay me.

I have borrowed the $100 from you in a very literal sense and the only thing backing that loan is my future production and the widget.

You have borrowed the widget from me, and the widget is worth ten dollars. I have no problem with this formulation. More precisely, "ten dollars" names the value of the widget in common parlance (the language we agree upon in the market).

The point is that you haven't borrowed money from me or anyone else. Neither one of us must possess $100 before the transaction. We might both have popped into existence along with widget an instant before.

Banks do borrow at the short end of the curve and lend at the long end.

But the borrow is not necessary to extend credit. Banks needn't borrow (accept deposits) to extend credit at all, and in some banking systems, they don't. Some banking systems have no reserve requirement. In principle, you could open a bank, fetch some newly created money from the monetary authority and immediately start lending it. The monetary authority avoids creating too much money this way, hopefully, because that's just his job. He's a state regulatory agent.

Borrowing is cheaper than raising equity, so the margin is much higher.

I don't know why this is true, except that bankruptcy courts order bondholders paid before equity holders. It's just a matter of statutory authority, because the state orders priorities this way. Why else would it be true?

Of course, so is the risk of so much leverage – which is why it's particularly unwise to loosen lending standards as much as they were loosened in the past few years.

Certainly, a reserve requirement is only one possible regulation. Others seem advisable. I'm definitely not an anarchist here.

"Borrowing" is something else really. This word suggests that I take possession of something of real value today and exchange it for your widget today.

No, I'm borrowing from you to buy the widget. I'm taking possession of your widget today (which has value) and I'm paying your for the widget over time.

You don't borrow money from me to buy the widget. You borrow the widget from me. I say this myself. You obtain the value of the widget in some other form to compensate me later. You don't borrow the value of the widget to exchange this borrowed value for my valuable widget at the point of sale. You only provide me the value of the widget over time after the exchange. That's credit.

If I had paid you the $100 today, you could have reinvested it in inventory, or put it toward other productive use.

We don't put money to productive use as much as money accounts for things we put to productive use. I put the widget to productive use by lending it to you. Perhaps, I expect you to put the widget to productive use to earn its price. I don't need money for this purpose. I need the widget.

The point is that we don't need money for this purpose. We can imagine money if we like. This imaginary money is like the money that monetary authorities circulate. That's my point.

Your opportunity cost of lending me the $100 has real value to you.

I don't lend you $100. I lend you a widget. You and I agree to name the value of this widget "$100". I enter this name in my accounting ledger.

If you want to agree that my accounting entry is money, that's fine. I'll agree. Money is an accounting device, like so many entries in a ledger. That's my point.

The only difference in your widget scenario and what you describe as "borrowing" is who is doing the lending. Otherwise, they are exactly the same.

That the scenarios are essentially the same is precisely my point. If we agree that I've lent you $100, then I might as well be the author of this money myself. I am the monetary authority. If another monetary authority will then exchange its notes for my accounts receivable (or lend me its money with my accounts receivable as collateral), then I may exchange my money for this other money. Anyone may create money this way.

True enough. There's nothing to stop government from printing money. However, you simply can't say this is what happens routinely. If it did, our inflation rate would start to rival Zimbabwe's. This is starting to smell of the gold standard argument. Is this where you're going?

No, it does happen routinely. It happens every day. Our inflation rate doesn't rival Zimbabwe's, because we don't create money as rapidly, but we do create it continuously. We also destroy it continuously.

This is starting to smell of the gold standard argument. Is this where you're going?

No. Vidyohs will tell you that I'm no champion of what people commonly imagine as "the gold standard". Money is not a commodity. It's an accounting device. A gold standard only fixes the price of gold and requires decentralized monetary authorities to bank gold and trade it at this fixed price. A gold standard does not dictate how much money the authorities may circulate. It implies no one-to-one correspondence between banked gold and bank notes redeemable in gold. It only requires gold bankers to redeem notes for gold at the established price.

Methinks August 27, 2008 at 12:02 am

But he doesn't risk loss of the deposit. He suffers no nominal risk at all, i.e. he knows precisely the numeric value of his return with practical certainty. That's the whole point.

FDIC insurance is the only thing giving the CD investor that certainty. Anything above $100K is lost if the bank goes under. Without FDIC nothing is insured at all and his only guarantee is backed by the credit of the bank. But this is still not the whole point. Opportunity cost doesn't disappear because you choose to ignore it. Nor can the risk to any CD above $100K.

The Fed effectively regulates this rate through open market operations, so the rate rises at the Fed's command. It's true that you don't now what the Fed will do, but your uncertainty doesn't imply a free market. No one knew what Mussolini or Stalin would do either.

I think you give too much credit to the Fed to be able to effect rates. Like OPEC, it's pretty successful in regulating short term rates in a small range. But if market opinion varies significantly, the Fed loses that control quickly. Ultimately, the market dictates rates at the short end of the curve. The Fed has long ago admitted defeat at the long end.

Real assets can appreciate, but money is an accounting device rather than a real asset. It accounts for the holder's entitlement to consume. When you hold money, you're playing an entitlement game with monetary authorities, and this game is like the market only insofar as monetary authorities construct the game this way.

I don't disagree with you. Here, I think we have a jargon issue that I think we should clear up. "Real assets" are physical assets like land, houses, gold, oil. But the term "asset" can be applied to shares in a company, which are a claim on the company's residual income as well as credit extended to companies in the form of bonds. When I say "assets may rise or fall in value", I include all types of assets. Real assets are expected to rise with inflation, but bonds will fall in value and stocks may rise or fall depending on many variables as inflation increases. This is why savers, who are often invested in stocks and bonds, lose when inflation rises.

It's a real loss of entitlement to consume, compared with the entitlement that might be earned otherwise.

No. when opportunity cost rises, there is a real loss of value. I think you're going off on a tangent. It may be a worthy tangent, but it's not relevant to this subject.

In principle, individual banks could do the same without a central bank. The central bank is only a regulatory authority presumably preventing individual banks from creating money excessively by setting reserve requirements among other things.

I'm with you through that whole section from which I excerpted the above bit. Maybe we're talking past each other, but whether the bank lends 2 dollars for every 1 dollar in reserves or 100 dollars for every dollar in reserve, it must hold reserves to be able to lend and it must get those reserves somewhere. To maintain the entitlement to lend (as you put it), it must find marginable reserves.

Maybe I made the widget myself. Does it matter?

Yes. Your labour is worth something and you probably had to buy materials to make the widgets. Even if a widget is defined as a poem you wrote, it still has value because I've just parted with $100 for it and you decided it was worth your time to create, so the alternative uses of your time to be less valuable.

This is credit. Credit doesn't require you to borrow money from me or anyone else before the transaction. It only requires me to obtain money after the transaction. I understand your objection to this formulation, but the objection is only semantic.

That's my point, Martin. The difference is certainly NOT merely semantic. I think you're confusing explicit borrowing from, say, my friend Jane to pay for the widget and implicitly borrowing from you because you accepted payment in the future. Although, I'm not sure why you're having such a hard time seeing that the two are the same thing.

The point is that you haven't borrowed money from me or anyone else. Neither one of us must possess $100 before the transaction. We might both have popped into existence along with widget an instant before.

Martin, you're making an elementary mistake here that I'm pretty sure you don't make in your real life decisions. Let me think about how to explain this better and get back to you (it's late and the brain is creaky right now).

Borrowing is cheaper than raising equity, so the margin is much higher.

I don't know why this is true, except that bankruptcy courts order bondholders paid before equity holders. It's just a matter of statutory authority, because the state orders priorities this way. Why else would it be true?

Even if the firm never goes into bankruptcy, bond holders must be paid at regular intervals and before common shareholders. Debt service appears in the expenses portion of an income statement. The income left for common shareholders is whatever is left over after everyone else gets paid – hence, a shareholder is a residual owner of the company. Because they are the last in line, shareholders bear the most risk and require a higher rate of return to compensate for that risk. Thus, a company may float a bond issue with a 6% coupon but the same company will not be able to raise equity capital unless it can convince potential buyers of the equity that the expected return will be 10%. Of course, all of these rules are set by some statutory authority.

Certainly, a reserve requirement is only one possible regulation. Others seem advisable. I'm definitely not an anarchist here.

Regulation isn't going to fix stupidity, greed, and hubris. Only the threat of failure will mitigate those instincts. The regulators are offering a bailout and threatening regulation. Regulation which will be swiftly circumvented or changed to create more rents for lenders. My observation from working for a long time in a highly regulated industry is that regulation favours those being regulated and at the expense of the customers.

You don't borrow money from me to buy the widget. You borrow the widget from me.

No, I'm not borrowing the widget. You don't expect the widget to be returned to you. You expect money to flow to you over time in exchange for the widget. For the time that I have the widget but you have not yet received all the money, I have implicitly borrowed the money from you.

We don't put money to productive use as much as money accounts for things we put to productive use. I put the widget to productive use by lending it to you.

First of all, you're not lending the widget. Second, how are you putting the widget to productive use by selling it to me on credit? Why is selling me the widget on credit more appealing to you than receiving the full price of the widget at the point of sale? If it is not more appealing, then how are you being compensated for choosing the less appealing option to make you indifferent between the two options?

The point is that we don't need money for this purpose. We can imagine money if we like.

Let's assume that money represents our individual production. So, instead of directly exchanging the goods I produce for your widget, assume I give you much more easy to handle paper bills which represent my production. So, we're bartering, but paper currency represents my production, which I'm exchanging for yours (the widget). To make things easier, let's assume that this is what we mean by "money".

No, it does happen routinely. It happens every day. Our inflation rate doesn't rival Zimbabwe's, because we don't create money as rapidly, but we do create it continuously.

I agree with that. I thought you meant that the Fed routinely prints money without regard to actual productivity. That happens, but not routinely.

Methinks August 27, 2008 at 12:03 am

Dang! This business of quoting the passage one is responding to creates some amazingly long posts!

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