patrick.net

Nobody should worry about losing cash unless its over the FDIC limit.

I forget what the law is, but I think the Fed has to raise interest rates in order to attract capital. They won't just run the printing press.

The will run the presses, however, to reflate the banking system so banks can make new loans. This is neither inflationary or deflationary. Your neighbors default on their mortgages, housing costs drop (deflation) and the Fed prints new money to lend to the local bank to keep it and your savings solvent. You can then borrow this new money to buy your neighbors house at a steep discount.

Note that this is all good. Capital flows from weak hands to strong hands.

Under a fiat currency system, with fractional reserve lending, its critical to keep in mind that our money is backed by debt. I.e., a promise of future work/labor. So you are correct about that.

This is actually much more powerful than a gold standard. For one, the Fed can easily reflate the money supply when loans go bad. Two, under a gold standard, you ultimately end up with 1/3 of the population working as gold miners and brokers. Its a tremendous malinvestment of labor.

However, the fundamental problem with our system is that since money and debt are essentially equivalent; bad debt becomes no different than counterfeiting. The entire Wall Street/Main Street meltdown basically amounted to crooks on both sides of town mixing junk debt with good debt. And as I've written before Gresham's Law is immutable and the bad debt has essentially pushed the good out of the system.

There are a couple solutions to this.

One, we need to start treating debt more like money. So, it should be both harder to get into and out of. For example; there should be caps on credit cards and home loans; both of which should be required by law to be secured against income.

Same thing with corporate debt and government debt. There should be clear, unambiguous ceilings on both of them.

Two; we need to nationalize at least one big bank and start lending directly from the printing press. This will be more reflationary than inflationary. The goal should be to provide small lines of consumer credit and home loans to folks that were wiped out during the current collapse. Secured against income, of course.

Three; we need to led deflation run its course. This is the only way to force the bad debt out of the system and attract new investment. Something I disagree with Mish about is that there is no money on the sidelines. Personally, I think there is *plenty*, its just not moving until prices collapse. After all, it was the global pool of money that contributed to the housing bubble in the first place!

The only real problem, if you can call it one, with deflation is high unemployment. And again, there is a trivial solution to this. Drastically the sales tax and progressive income tax. Oil, luxury goods and alcohol/tobacco/firearms should all be taxed at 100%. And the revenue funneled directly into domestic job creation.

Kewp:

I agree that deflation should be allowed to run its course (and I am one who could get very hurt by that.) But there are problems with your recommendations. For instance:

And again, there is a trivial solution to this. Drastically [increase] the sales tax and progressive income tax. Oil, luxury goods and alcohol/tobacco/firearms should all be taxed at 100%. And the revenue funneled directly into domestic job creation.

The first objection: Back about 20 years ago Congress decided they were going to get revenue by taxing "luxury" goods at 10%. Rich people could afford the tithe on their yachts, after all. So the 10% surtax proceeded to absolutely destroy the American yacht-building industry. Wiped it very nearly out. All those hundreds of thousands of workers out of their jobs. That tax was repealed for that very reason.

Second: "revenue funneled..." I've been seeing a lot of revenue funneling lately. Damn big lot of it, as a matter of fact, with another trillion on the way. Has it fixed any of the problem it was supposedly aimed at? What happens when the revenues are funneled to subsidizing tobacco agriculture that has been hit by (yet another) 100% tax on the product, and so cutting into those jobs? Will you applaud that decision? Or the Smith and Wesson job enhancement act? I know! Let's put 100% surcharge on iPods! That's a luxury good, no doubt. Or how about we smack "renewable energy" with 100% tax, since that's where all the "smart money" is supposed to be going, the coming thing, surely it will be where all the growth in the US will be, all those green jobs Obama will create, and use those bucks to fund busy work jobs for door-knob polishers in Trenton? How does that strike you?

So let's tax "bad" businesses out of existence to give Congress yet more money to throw into the pockets of other businesses, which *is* the way these things actually work in the real world.

"money is time"

I also think money is stored/spent energy. When you hold a gold coin and think of the time and energy that went into pulling that out of the ground. Wow.

Whereas, pouring in some ink and running paper through a press; Not so much.

Hrm, all good points.

I'll say just tax oil, booze, tobacco and firearms at 100%. Use the money collected to extended UE and create food stamps.

Oh, and legalize drugs. Tax them at 100% as well.

TOB:
You can’t change that by fiat, because you wind up overvaluing unskilled, inexperienced, “entry level” positions relative to the rest of the labor force.

or perhaps undervaluing the skills they gain in these positions? Top-down economics tends to model everyone is mindless uncreative dolts with their hands out for a bag of peanuts at the end of the day. If we support that model, thats what we’ll get.

Please note I said "positions". Not "People", "Dolts", "Cretins". The positions require little of anything, which is why they are "entry level". As people build up experience and skills, they move on. I started out pushing a broom. I am a bottom up guy. It's the top-down folks (of any political ilk) that screw things and people over.

As for interventionist policy, I say "raise the gas tax 10 cents a month for the next 16 months- use the 320 billion per year (each penny is aprox. 2 billion of rev. annually) to build and operate REAL high speed rail across the entire nation. Require all suppliers to be domestic. This puts people to work both building and operating the system."

Oh, by the way, why didn't the govenator do this?

It gets confusing because I’m not sure what cash really is. If taxpayers lose all their money, they could print more and pay themselves back. Would that be inflationary?

Absolutely it would be. It's only the fact that money is balanced by debt that money creation by banks is not usually very inflationary. Take away the debt side (say everyone is liberated from their mortgages), and leave the credit side (every body gets to keep the money they have in the bank), and you'll get an explosion of inflation like never seen before.

I searched for the word "asset" in the above an so far it has been used only twice in this thread.

Sure, money has an equivalent in labor. It also has an equivalent in assets.

The problem with money is when there is a big imbalance between the amount of monetized assets versus the amount of monetized labor(per year, or whatever). At some stage there is a tipping point, and people start realizing that it is foolish to labor when instead one cane just speculate on the value of assets and make "money" that way. And then it is all downhill from there.

Where is the tipping point? I should check, but I'd say if the total value of all assets is higher than 5x the total amount of wages (actual wages, not capital gains) paid out in a year, there is trouble on the horizon.

Why 5x? Partly rectal extraction, partly an extrapolation of house=3*grosswages.

Taxing firearms is just subverting the second amendment further, and generally taxing things at different rates is very un-libertarian.

If it were up to me, all Inter-Nut Libertardians would be rounded up and sent to GitMo.

Then I would cut off all supplies to the island and all the 'free market' to create Utopia.

kewp fer prezidant!

Legalize it.

Don't criticize it.

Obama looks like the kind of cat that would pass the dutchie if you catch my drift...

Two definitions of "asset" I find helpful.

1) anything which has been improved by labor.

A rock isn't an asset, but add labor and it becomes a statue.

2) any physical thing which yields a net positive on your income sheet. i.e. it makes money.

Note the second simply destroys the notion that typical mortgage pits are "assets".

And a definition of money: any recognized medium of exchange which can be traded for goods, assets, or labor. Right now, you can pay me in gold, electronic numbers in my bank account, or slips of oddly colored paper. Tea leaves or cows or bags of salt? Not so much.

Patrick,

Interesting thread btw. I tend to look at this in practical terms. When we were young ( life held limitless possibilities ) and in ways that 'may' still come to fruition! But let's get real here, all during the boom we talked to people -already- in their late 40's and even their 50's that were foaming at the mouth to sign up for 30 yr. mortgages on homes that would 'never' be paid off!

I guess the better question is, why were these Jumbo mortgages written in the first place? Each of our bottom lines are a little different but if you're 50 and would 'like' to retire at 60, you and the wife only have 10 years left in the workforce. Your options are dwindling. Your combined income ( for simple math ) is $100k X 10 years = $1 mil. You just signed a mortgage for $1.2 mil. So now I guess we have to extend the debate into "over time"?

Congressional Sound and Fury Over Wall Street Bonuses Sure to Signify Nothing

http://www.nakedcapitalism.com/2009/01/congressional-sound-and-fury-over-wall.html

I’ll say just tax oil, booze, tobacco and firearms at 100%. Use the money collected to extended UE and create food stamps.

I'll say we just tax you at 150% and use the money for a patrick.net down-payment pool.

Let's have a quick vote here. :)

Aye.

As for interventionist policy, I say “raise the gas tax 10 cents a month for the next 16 months- use the 320 billion per year (each penny is aprox. 2 billion of rev. annually) to build and operate REAL high speed rail across the entire nation. Require all suppliers to be domestic. This puts people to work both building and operating the system.”

Interventionist policies do not work. The best way for the economy is to let everything come crashing down and let enterprising people rebuild the empire.

I’ll say we just tax you at 150% and use the money for a patrick.net down-payment pool.

Hey, said tax booze @100%. That's an effective 150% tax for me!

DinOR, Always nice to have you pop in. Woke up with a feeling of dread yesterday morning at that thought of the "stimulus" package and Keynesians running amok. Couldn't help but think of your "Hitting the wall at 100mph" aphorism -- except this time I fear the US government is going to give it a go. Evidently the market is having second thoughts too (see price of gold). I think I need a pep talk from one of the resident deflationistas.

Keynesians running amok

They are scarier than zombies.

kewp,

I hope there are not many people like you around. If you lived in the Weimar Republic, you would have been one of the many people standing by as millions of people were sent to their deaths.

Hilter loved gun control. If I had been in Germany at the time, I would have been an outlaw.

On second thought, if I lived in California with what I have, I would be an outlaw.

It is about time to slap some protectionist policy all around. Bravo Obama.

What is the point if I am living in the richest country in the world having to be exposed to melamine food scare? Why should China-made low quality ingredients infest every single aspect of my life? Why should I let my neighbors lose their jobs to China and India and create a hallowed out community around where I live and be exposed to unemployment crime?

This is a country rich in natural and human resources, and if we close our door tight entirely, it won't be the Americans that will suffer the most. So close the door, either default completely on our debt or just give them more freshly printed USD, let the other countries eat cake.

Certainly one's hours of labor are limited -- 40x52=2080 per year. But mass production quantities are just about unlimited -- mp3 files? So there is more value in equity than in labor. You can spend a few hours making a machine that makes products...then it is very valuable to own that machine.

On second thought, if I lived in California with what I have, I would be an outlaw.

"Assault" weapons? Or "unsafe" handguns?

And unless I'm mistaken, the Nazi's had guns too. Lots of them in fact. Good ones, even!

TOB,

I never owned any property in China, it is a personal principal of mine not to own any immobile assets in developing countries. I shorted the red chips from the peak all the way down :-) My biggest gain last year was by shorting BIDU.

I always wonder what makes liberals believe that outlawing guns can keep outlaws from owning guns.

The 2nd Amendment is arguably the most important amendment. The sixteenth is the least important and the most harmful.

Peter, be careful what you call a liberal. Being liberal is not bad. Being a leftist is bad. I do not consider them the same.

I know... most of my friends are (left-ish) liberals. :)

If they are "bad" why would I still befriend them?

Well... California.

In fact, even leftists are not so bad. They are bad only if they implement leftist policies.

Bad was not the best description. The leftist policies are bad. I also think the policies of the right are wrong.

What OO said.

"( see price of gold )" No Jive! Wow.

For me the broader point is, if there was a disconnect between incomes and home prices ( it was doubly so for the disconnect between incomes and actual labor! )

Some kind of twisted IPO/Start-Up scenario where people from all walks willingly subjected themselves to all manner of abuse if it meant they would become "rich, Rich!" ( so they ostensibly wouldn't be subjected to abuse ) ? WTF?

Sadly I feel the seeds of the 'next' bubble already being sown. Don't you just get the sense that others around us are already jockeying for position? Only this time they'll be smarter.

How about some good news? Last week I said the Fed's balance sheet could dip below $2 trillion. Check it out; Reserve Bank credit fell to $1.91 trillion, mainly on the strength of the improving commercial paper market (and declining repos). The last TAF auction only fell by $2 billion, so I'm not yet ready to declare victory (over the "credit crisis", and then we can get back to our regularly scheduled depression -- err, recession).

"It is about time to slap some protectionist policy all around. Bravo Obama.

What is the point if I am living in the richest country in the world having to be exposed to melamine food scare? Why should China-made low quality ingredients infest every single aspect of my life? Why should I let my neighbors lose their jobs to China and India and create a hallowed out community around where I live and be exposed to unemployment crime?

This is a country rich in natural and human resources, and if we close our door tight entirely, it won’t be the Americans that will suffer the most. So close the door..."

I see. Said another way, I got mine, I exploited the largesse of American society tolerating the H-1 program to make my fortune in the fortress, secure a foothold in the USA so I won't be subjected to chaos if things implode in my country, and, now that I've done that, time to close the door behind me because I got mine.

Got it.

sybrib,

I was never a Chinese citizen, so I don't care whether things implode there from day one.

And I never said H1B should be abandoned, I just think it should be tightened to reflect the economy. People migrate to the US not because they want to live in a third world country, but because they want to live in a first world country. Since I am a US citizen, shouldn't I care about what happens to the US than other countries? Shouldn't all US citizens would rather have other countries implode than the US?

I see.

Now that I've taken full advantage of America's culture of relative openness for immigration, now that I can count on protection of that US passport, now that I've got mine, time to close the door to the rest of the world.

Sybrib,
Being that the US of A is a democracy and I believe the majority of people are against H1B's then they should no longer exist. Whether you are for or against H1B's there is a need to make logical arguments, not emotional arguments. I think that in a recession they should cease, but if there is truly a need then great come on in. The fact that I know of a lot of great out of work engineers and that the large company I work for is still hiring H1B's really does not make sense. I have sent e-mails but we will see where that goes.

slumlord,

I hear ya, and I agree.

There's also a whole lot of "Now that I got mine, the problem with this (new) country of mine is all those goddarn foreigners they keep letting in". And this message seems to come loudly from those who wherever the heck they came from, were able to exploit privilege and American largesse to come here for grad school, an H-1 job, by various loophole hook and crook or whatever (sometimes marriage) turn that temporary privilege into a green card and then, particularly if from a country like Taiwan where they can get conscripted into a conflict, or China where they can get caught up in a political powderkeg, exempt themselves from those unfortunate situations by doing what it takes to become a US citizen. Wall themselves up in privileged Fortress neighborhood enclaves of like-minded folks. Fair enough. The American Dream. I suppose that my ancestors some of whom who arrived at Ellis Island and others who were early Puritan settlers in the Bay Colony were not too much different.

But then, now that we're here in the common fraternity of "citizens" safely ensconced in our Fortress Situation, well, now the whole damned problem is all those H-1's that "we" keep lettin' in, allowing themselves to be exploited at the expense of those of us who're already part of the fraternity. And oh by the way, now that I got mine, why the hell don't we build a Great Wall on the Mexican border to keep all those people out who live out their character at great risk to life and limb to feed their family?

That's the kind of folk we attract in Silicon Valley I suppose.

But damned if anyone else ought to be