What would happen if very little wealth was ever inherited?
By Bitcoins arent the future? Follow Mon, 31 Oct 2011, 10:12pm 5,860 views 77 comments
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46 male
Menlo Park, CA
thomas.wong1986 says
It would have to be current market value to work. Sure, there would be fights about valuations, but we have those fights now anyway.
Bellingham Bill says
Sort of. Inflation doesn't really tax the asset, just the currency itself. This tax would tax real estate and stocks too.
You know, this 2% asset tax is such a freakin brilliant idea I'm going to start a new thread about it.
Here it is: http://patrick.net/forum/?p=1133205
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Patrick says
Really...would you do the same for income?
I don't care how it's "derived" from...the thing people have to understand is that every dollar held creates a cost.
A dollar held has to be defended by the Army.
A dollar held has to be supported by the Treasury.
Most of all is the belief system in that dollar...each and everyone of us has to "believe" that that dollar is exchangeable for our hard work and labor.
Hence, we should be taxing dollars held...because they exert a cost on every citizen.
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OK then, would you support a 2% asset tax if it eliminates all other taxes?
Wait, I guess it was you who proposed the asset tax, above in this same thread. So you probably would support it.
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Patrick says
Yes, that's exactly what I want.
I want to mostly eliminate income tax...especially for anyone making less than $100,000.
I would also reduce sales taxes, business taxes and fees.
I would then replace those with a flat Asset Tax, assessed above $1M in assets.
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Patrick says
LOL! the 99% would certainly be ticked off on that one.. may even start to Occupy Pnet...
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If it's assessed only on amounts above $1M in assets it would have to be considerably higher than 2%.
Anyone know the fraction of all US assets is held by people with >$1M in assets?
I'm guessing it's about one third. So to tax just fortunes >$1M in assets, the tax would have to be three times as high, meaning 6%. But then, the first million would not be taxed, so they'd probably have to pay 7% on the amount over $1M.
Is it better for everyone to pay 2% or for people with assets over $1M to pay 7% on the amount over $1M?
I prefer a flat 2% on all assets, so we're all in this together from the start.
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thomas.wong1986 says
I don't know about that. Depends on their personal situation. I think for most people, their total taxes would fall.
In fact, I'd bet that for at least 80% of the population, they would pay less with a 2% asset tax than they currently pay in income and sales taxes.
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At least this discussion has moved beyond the simplistic notion that all we have to do is increase taxes on the 1%; In fact the tax system has been used to encourage and discourage different behavoirs. Why should someone whose behavoir and choices are a benefit to society be penalized just b/c they happen to reach the top 1%? On the other hand, when someone behaves in a way which doesn't benefit society - unproductive or worse - why should they be rewarded by the tax code? I like the idea of a wealth tax - but only after we have a citizen congress as Patrick suggested in an earlier thread and banned all political contributions. Otherwise the Koch bros and their ilk will have their bought and paid for pols put copious loopholes in the code and make it meaningless. At present it would be easier to beef up the taxes on all inherited wealth. I only know one person who makes over $1M per year. He runs a company, lectures at a university and still finds time to volunteer in the community. He is a productive member of society. I know several trustfunders with much smaller unearned incomes who don't work, don't volunteer and don't appear to do much of benefit to society. I would much rather see the trustfunders pay a hefty tax rate even if their income is a small fraction of the average one percenters income.
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Patrick says
The only way to prevent that is to change the laws that currently reward and protect capital at the expense of labor. Since the politicians are bribed by capital through the lobbying system, the write to favor capital holders or submit laws written by the lawyers of capital holders.
Michael Moore is right that the balance of power must be shifted away from capital and back to labor, i.e., production.
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Bitcoins are the future says
Although this may mitigate the problem, it would not solve it because it does not address the root of the problem. The extremely wealth (0.5% or less) obtain their wealth through zero-sum games. These wealthy would still play such games even if inheritance was taxed at 100%.
The most it would change is that rich would spend their money even more frivolously and give more of it to their heirs sooner.
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Dan8267 says
Good. That's what an economy is. Idle wealth is the Devil's plaything. I wouldn't care if someone made $1bn/month if they spent all of it (on something other than political influence).
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Patrick says
what happens if the asset loses value? Does Gov send a check? For example, if you held stock in buggy whips in 1890, you were doing pretty good, but in 1920 your assets were almost worthless. Would that be an issue?
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Bap33 says
If the asset loses value, you owe less asset tax.
Government does not send a check.
But I could see some people losing if they get taxed on some stock and it plummets later that year. Or not paying enough if they can manipulate the price downward on "valuation day".
So how to value over time? Maybe the average value for the number of days you owned it that year?
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About taxing wealth; You are making an assumption that the wealthy cannot hide their wealth. (Metals, diamonds, foriegn accounts, etc) all good and easy to hide.
If I think about the government taking 10% of whatever was in my bank account every year, my mind suddently shifts into high gear on how to keep as little in any paper account as possible.
This doesn't seem like a good formula for taxation, more just like a good formula on how to drive wealth underground and out of the governments view.
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cc0 says
Savings don't have to be "idle". It's not like people bury their money in a tin can in their backyard. Money being saved even in a highly liquid account like a money market account is actively being used to support businesses. That money can be used for short term or long term loans that allows businesses to expand and hire or new businesses to be started, or let let individual buy houses or invest in education. That used to be the whole point of the banking system.
Savings aren't evil.
And I don't think the absolute amount of money in an economy means anything. It's only the differential that counts. After all, the dollar is a completely arbitrary unit of measurement. If there were more or fewer dollars, the economy would run exactly the same way. The only thing that throws a monkey wrench into the economy is the change in the supply of dollars, not the absolute number of dollars.
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Dan8267 says
I'm pretty sure all that talk about "supporting business" is nonsense. The best way to support a business is to patronize it and that's quite the opposite of savings.
I don't know what the second half of your post is about, but imagine two islands. On each island there is a total wealth of $100, and there is a total population of 10. On Island "A", 1 person has $91 and everyone else has $1. On Island "B", every person has $10.
Economic activity on Island "A" is going to be seriously stunted because of the artificial restriction of cash. Even if the 91%er puts all his money into business loans, there's still only $9 worth of real value because anything else is simply a debt owed to the 91%er. That would cause the prices of real goods to crash (simple supply and demand here) and the 91%er would buy it at the firesale prices. They don't have to worry about increasing the money supply because they control all the real property.
Economic activity on Island "B" is far more robust. Everyone is equal and can share equally in all transactions. The costs of goods is fair among all inhabitants. Assume there is no means to acquire debt. If you want something, you have to work for it. Your own savings slightly tips things in your favor (because of the reduction in cash and your increased savings). This naturally drives prices down oh so much. You now have two choices: spend because the thing you were saving for is now affordable (say, a house), or keep saving until you become the 91%er.
If there's a mechanism which prevents someone from acquiring such massive wealth so that society stays roughly balanced, that society thrives. In fact, the people on Island "B" could have a "let's burn 90% of our money" party so that the total amount of wealth drops to $10. If everyone still has a roughly equal $1 apiece, prices correct naturally and none are the wiser.
But then the government gets involved and says that this fixed money is no good because it can't raise enough revenue so it switches to a fiat currency and everyone is so much better off because now they have to work harder to keep up with their ever devalued money, while the raised revenues can go to pay for social programs. Of course, this creates a monied interest that distorts the economy because money is something that can be controlled by fiat so that island then becomes Zimbabwe and everyone is eventually forced back to a hard money system.
So yeah, it's all futile and we're going to get screwed because we can't see it happening.
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Proverbs 13:22
A good man leaves an inheritance to his children's children, And the wealth of the sinner is stored up for the righteous.
The following are critical for a thriving economy: faith (preferably Christian), hope - future oriented, charity, self government (limited government), honest weights and measures, keeping oaths and contractual obligations, rule of righteous law and protestant work ethic.
Recognize that it is only God that gives the ability create wealth and all of the earth and everything in it belongs to the Lord.
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country_stroll says
I don't think so.
Hogwash.
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I think they should tax capital gains and appreciation same as labor or higher. What we have, and I do agree with Patrick, is a tax policy sheltering the wealthy by sticking the middle class with the bill.
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wcalleallegre says
set the value of a male between the ages of twenty and sixty at fifty shekels[a] of silver, according to the sanctuary shekel[b]; 4 for a female, set her value at thirty shekels
Leviticus 27:3-4
I.e., you can place a dollar amount on human life and a man's life is worth 67% more than a woman's life.
If a man happens to meet a virgin who is not pledged to be married and rapes her and they are discovered, he shall pay her father fifty shekels of silver. He must marry the young woman, for he has violated her. He can never divorce her as long as he lives.
Deuteronomy 22:28-29
Well, I suppose he rapist is getting punished since he has to get married, and fifty shekels sounds like a fair price for committing rape. [Note: This is sarcasm. I know some people on the Internet have a hard time telling that.] Oh, by the way, I like how the "punishment" is conditional upon they guy getting caught. If he doesn't get caught in the act, he gets away scot-free.
Never take moral advice from a book that is pro-slavery, pro-murder (at many times), xenophobic, homophobic, and downright sexist as the bible. And certainly, don't take financial advice from it.
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FortWayne says
capitalTaxRate = max(0.00, 1.00 - 0.01 * numberOfMonthsCommodityIsHeld)
Perfect solution. The short-term capital tax starts at 100% and is lowered by 1% every month until, 8 1/3 years later, it is at 0%. This greatly encourages long-term investing while eliminating bubbles, micro-trading, and speculation.
Naturally, we could parametrize and tweak the formula. But I think these default settings would work wonderfully.
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cc0 says
I agree that wealth inequality, especially extreme wealth inequality, does hamper economic efficiency. However, I do not think that even your simplified island economy is accurately modeled by your analysis.
Certainly, a single person having 91% of the wealth on island A is going to hamper efficiency and growth, however, that does not mean that the 91% of the wealth or 91% of the money is necessarily wasted when not used for consumption.
First, we must distinguish between wealth and money. You use the terms interchangeably, but there is a very important distinction. Money is a medium for the exchange of goods and services, and as such can also be used as a measurement of entitlement to wealth, but money itself is not wealth. Goods and services are wealth.
Scenario 1
Rich has 91% of the money, not wealth, on the island. Rich decides to keep all his money in a tin can buried in the sand under his tent. Rich never, ever takes any of that money out and spends it. What happens to the economy?
The money supplied has suddenly dropped by 91%. Each dollar is now worth about 10 times as much. The remaining nine people simply move a decimal point in their price list and continue trading as normal. Although Rich has more money than anyone else, he is in fact the poorest person on the island because he never transforms that money into actual wealth.
Scenario 2
Rich has 91% of the money, not wealth, on the island. Rich decides to invest most of his money into other people's businesses, spending on a modest amount on goods and services for himself. In this scenario, Rich is simply forgoing consumption and instantaneous gratification in favor of long-term prosperity.
For simplicity sake, let's assume that there is no inflation, printing of money, on the island. So the money supply is always exactly $100. If needed, smaller and smaller denominations could be made, one dollar, a dime, a penny, a mill, a deci-mill, etc. as needed by the economy. Actually, we could run the whole economy on $1 if we could arbitrarily slice that dollar, but that's another story.
Let's say that each of the others on island A spend $7 on personal consumption and $2 on running their businesses. The $2 is just enough to maintain the business's day to day expenses. In effect they are all spending $9/day: $7/day for personal consumption and $2/day in supplies or services for running their business. Ultimately, all $9 goes to one or more of the other commoners on the island because Rich doesn't actually produce any goods or services.
Assuming an equilibrium, strictly to keep the discussion reasonably simple, all businesses also take in $9 a day in sales. This is a reasonable assumption since Rich so far is not participating in the economy at all. If an equilibrium did not exist, then one business would die out as another prospered, but that wouldn't be Rich's fault.
Ok, so without Rich, each business and its owner are at a stable state in which income and expenses are equal and nothing changes.
Rich decides that he is tired of forging for himself and wishes to spend some of his money and invest the rest. Rich spends $11/day on himself giving him a slightly higher standard of living than the others. However, by introducing that $11 back into circulation, he lowers the value of everyone else's money, so they are no better off. Actually, they are slightly worse off because they are now producing goods and services for someone who isn't producing anything to give back.
However, Rich also decides to use most of his money into other people's businesses. He loans Bob, the Banana Man, $30 for two months, expecting $35 back in 60 days. Yes, that's a bit steep for interest, but Rich has the only money to be lent and he's taking a big risk on Bob.
Bob uses the $30 to buy additional goods from Stan the Stick Maker. Bob commissions Stan to create the ultimate Banana grabbing stick. Stan gladly does this for the generous sum of $30. So Bob now has the +1 Uber Banana Grabber. With this tool, Bob now can gather twice as many bananas a day. His sales increase from $7/day to $12/day. Diminishing returns puts a limit on the increase in value. Nonetheless, Bob is much better off and is able to repay the loan and interest.
So, you see, in this scenario, Rich's personal consumption actually hurt everyone else, but his investment (savings being loaned to others) actually increased the wealth of the island economy. Yes, the initial wealth disparity does allow Rich to in effect leach off of others since he doesn't have to produce anything. However, that is a bad effect of the inequality. It is not a bad effect of Rich's decision to replace consumption with investment.
Most importantly of all, even though the number of dollars on the island if fixed, the wealth is not. Wealth can grow from proper investment of resources into increasing production or advancing technology.
Robots and Pizza
A classic example of this is Robots vs. Pizza. A man can produce 10 pizzas a day. Or he can produce one robot a day. The robot can produce 2 pizzas a day. What should the man do: make pizzas or robots?
Well, initially, the man is better off making pizzas. But if the man forgoes making pizzas for five days (that's 50 pizzas lost), he can make enough robots to produce 10 pizzas a day without ever having to work again. Actually, since the first robot comes online at the start of day two, the math works out to be 30 pizzas lost.
However, if he keeps making robots for a little while longer, he comes out ahead and can retire while still having a larger income. The wealth growth is even greater if the robots can also make other robots, even if it takes a robot 10 days to build a single other robot. Naturally, the growth would be slowed down if the robots require maintenance, but as long as the maintenance costs are reasonable, the man still comes out ahead by building robots.
This is exactly the kind of non-zero game investment that makes economies grow and per-capita wealth increase. In my opinion, America makes too many pizzas and not enough robots. Our economy would be better if it wasn't 70% consumption, but rather 30% consumption and 70% robot, er, capital goods creation. I always try to optimize the long-term prosperity.
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I think your pizza/robot thing starts out making sense but then goes wildly astray.
It's core assumption is the worker gets to eat the pizza, or is otherwise personally enriched by this increased production.
Increasing worker productivity is not generally being realized by that worker.
You build a lot of robots, and scramble over pizza scraps from the dumpster, while your CEO thinks he has to amass a lot of pizza to be successful but doesn't know quite what to do with it beyond sharing it with special friends so buries a lot of it in a vault.
For salient examples of the FACT of this, see any Fortune 500 company engaging in layoffs even as they wallow in record productivity, profits and cash on hand.
The American working classes, by going along with this plan to date, have been building the rifles and ammo used by the firing squads. Until their number is called, and then SURPRISE it's your turn, never saw THAT coming.
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If society produces automation that can effectively and without human interference perform all work needed to be done to fully satisfy human demands, then the solution is simply to nationalize the robotic task force and let everyone retire to their own private island, built by the robots of course. No one has to work, and we all have a high quality of life.
Where economists and business men see problems, engineers see solutions.
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Vicente says
Certainly, if increase productivity comes from squeezing employees as it has done so in America over the past decade, then there is no benefit for society or labor.
The robot vs. pizza allegory was about capital goods investment vs. consumer goods consumption. In the story, there is only one worker and he's also the business owner.
I wouldn't extend this allegory to attempt to model the dynamics of how technological improvement affects the labor-capital power struggle. That's a whole different issue.
I will say that in my opinion a socially just economic system would follow the law of equalization of net income or some similar principle in determining how much of the generated wealth goes to labor and how much goes to capital return.
Richard Dawkins, my favorite author, wrote a book in which he discusses how a certain species of slime mold has three modes of living. When resources are plentiful, the slime mold is a colony of millions of bacteria that all are clones of one of a dozen or so individual set of genes. When resources become scarce, the slime mold forms a single organism that can crawl a short distance looking for more resources.
If that fails, the individual cells in the organism reshape to form a stalk and seed that will be carried by the wind. Any cell forming the stalk pays the cost of its life but does get the benefit of reproduction -- that is reserved for the individual cells in the seed. Since the individual cells are clones of a dozen or so original cells with different sets of genes, there is competition among the twelve or so genetic partitions to have the most cells in the seed. The species of slime mold solves this problem using the law of equalization of net income, which basically means that the seed is shared equally by ratio of cells that form the seed and cells that form the stalk.
Of course, Richard Dawkins explains this much better in his books than I do at 3 a.m. on the Internet. I really need to get to sleep.
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One thing about rising productivity is that per-capita health care costs have risen from $4000 in 1996 to $8000 today.
How can a family of 4 pay that bill???
Capital-holders by definition don't work, so that bill is going to have to be paid by the working class.
Same thing with our $900B or whatever military. That's $7000 per household.
Throw in the $3.85/gallon gas I bought today, vs:
http://www.youtube.com/watch?v=FZfbJRMZ8aU
The average household buys 1000 gallons of gas a year. That's another $3000 leaving the paycheck economy compared to 1998.
Mfg, down 6 million jobs since 1999:
http://research.stlouisfed.org/fred2/series/USGOOD
Construction, down 2M
http://research.stlouisfed.org/fred2/series/USCONS
Information, down 1M:
http://research.stlouisfed.org/fred2/series/USINFO
FIRE's down 1M too:
http://research.stlouisfed.org/fred2/series/USFIRE
Leisure & Hospitality is hanging in there, go figure:
http://research.stlouisfed.org/fred2/series/USLAH
Gov't's down 500,000:
http://research.stlouisfed.org/fred2/graph/?g=38T
Health care is a "bright" spot:
http://research.stlouisfed.org/fred2/graph/?g=38U
blue line is total employees, red line is employees per capita.
Since 1996 the ratio has moved from 1 health care worker per 20 adults to 1 every 17. That's great but we've got to pay for that labor somehow.
Education's doing well:
http://research.stlouisfed.org/fred2/series/CES6561000001
growing 50% since 1998, but, again, not sure how we're going to pay all these people.
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That's quite a thesis, Dan.
Dan8267 says
Money is utilitarian but it is meant to represent wealth, so for most discussions they are interchangeable. And you don't have to believe me, let me quote someone far smarter:
"Good and services are wealth."
"Money is the medium of exchange of goods and services."
Dan8267 says
cc0 says
So let's assume that a house would nominally cost $5 if everyone had $10. As we both describe, the cost of the house would by necessity fall to $0.45. Let's now assume that Rich isn't a moron. This property that represents 50% of everyone else's worth, represents 0.5% of Rich's. He buys it for $1, which is far more than anyone else can afford but is barely 1% of his own worth, and rents it. Rich gets his money back plus more plus he has the house.
You may ask what good the house is when all the money flows into Rich's pockets and everybody else has $0. That's a good question. Ultimately, the ultrarich are a hazard to themselves as well.
Dan8267 says
Same as above. If he's charging usury (in the classical sense) it's the same outcome. Even if that particular business goes bust, the majority of economy is still Rich's.
Dan8267 says
So the problem identified is that the ultrarich get more than they spend. Let's get back to everyone spends $9/day. Let's also assume that they earn $9/day. Let's assume that Rich isn't a moron again. He spends at $9/day most of the time, except when Bob pays back his loan. Now, Rich has another $5, which represents 500% of the average person's wealth*. He blows $4 and everyone is in awe that he could spend so frivolously. Yet he remains $1 ahead, and everyone else loses 10% of their buying power. After ±600 days Rich has all the money.
* Remember that Rich has $91 and everyone else has $1. They can still earn and spend $9/day; $1 is the value of their account at the end of the day.
Dan8267 says
Interesting observation. I wonder what it means. Will Rich recoup his $11 through his ownership of property or debt?
The inflation this drives must make everyone upset. Do they complain about the increasing prices or do they enjoy their increased amount of money? Which rises first?
Not Sure says
Should we agree that people are no longer citizens if they're dead? That would certainly put a wrinkle in history when then-president Reagan made William Penn a posthumous citizen.
If you want to give your money away, do it while it's yours. If you want to perpetuate a medieval European style aristocracy, try to find a place that still dares practice it.
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cc0 says
Appealing to my ego has no effect. I'm a rationalist.
cc0 says
Agreed. I'm not sure what we're disagreeing about. My point is that savings do not have to be a drag on the economy because savings can be used for investment in capital goods, infrastructure, expanding existing businesses, and starting new businesses. Money does not have to be spent on consumption in order to flow back into the economy and stimulate growth.
In fact, consumption is the worst way to stimulate growth because consumption is a one-shot deal. Building a factory or physical infrastructure or information infrastructure may not result in an immediate increase in wealth, but it does increase wealth in the long run. This issue is orthogonal to the problems of the rich-everyoneElse gap. Investors don't have be wealthy. Everyone with a savings account or retirement plan is an investor.
cc0 says
The immediate enjoyment of increased income happens first. Only later do the effects of inflation make it into the economy. That's why banks and borrowers come ahead. They enjoy the benefits of the newly created money before the effects of inflation propagate through the complex economy. Newly created money is worth as much as the old money for a short period of time. So in a way, the banks and borrowers are stealing purchasing power from others every time they create money in a fractional reserve banking system.
cc0 says
Yes, but that's an argument against grotesque wealth inequality, not against saving. We both agree that there are many problems caused by the existence of an economic ruling class.
cc0 says
I believe dead people aren't counted as citizens. They can't vote, sign new contracts, and aren't counted in the census.
As for the William Penn thing, I don't know what practical effects resulted from a long dead person being declared a citizen, especially one that died on July 30, 1718, long before America became a nation. Sounds like political b.s. to me. But I'm not familiar with the story.
In conclusion, I agree with you that wealth inequality is a bad thing for many reasons and that great inequality effectively lets people freeload. However, I do not buy the argument that savings, especially done by the middle class, is a bad thing for the economy. Nor do I accept that investment in future growth is in any way inferior to consumer consumption. In fact, I believe the opposite.
Finally, I do not consider investment to be inherently evil. Speculation and zero-sum games are bad, but real investment is the trading of instantaneous gratification for long-term prosperity and is ultimately good for everyone. Investment, unlike speculation, is not parasitic. Positive sum games are good.
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cc0 says
I am 100% against granting citizenship to illegal zombies. They are here to eat our brains and do not deserve citizenship, even though they score higher on the citizenship test than most U.S.-born citizens.
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Dan8267 says
I think the problem is that I said "Idle wealth is the Devil's plaything." This is a play on what I thought was a familiar phrase: Idle hands are a Devil's plaything. Perhaps it's a regional thing.
However...
Dan8267 says
I'm not a huge fan of consumerism. Ever though a number of things said grate me, I quite enjoy this little clip: http://www.storyofstuff.org/movies-all/story-of-stuff/
(Looks like they're expanding ... might have to go back and look at their other productions sometime.)
However, building a factory is a form of consumption. Consumption is what we do - whether we consume ideas, food, lumber and concrete, or worthless crap we don't need.
Dan8267 says
Absolutely. In our system (of U.S. dollars), the owners of everything are the Federal Reserve (says so right on the note). They keep 6% of everything paid them in interest as a form of flat tax and the rest goes to the U.S. Treasury.
Dan8267 says
In an ideal system there would be no savings. Money would always be put to use in some form or another. You're assuming that anything "saved" is simultaneously available for investment, which are really diametrically opposed ideas. In many cultures, savings = physical gold and gemstones (typically jewelry), especially if the currency is unreliable.
However, there is also reality. I'm not ready to make recommendations but it seems to me that you should save or invest for a future in which you become indolent. The alternative is either poverty or welfare (either state of familial). These seem like greater offenses than the productive losses from your meager savings. Assuming, of course, that they are meager, and not the $2 trillion corporations have sitting idle.
And I agree, no citizenship to illegal zombies.
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cc0 says
Do savings have to be idle? Perhaps in a 0% interest environment. But under more sane conditions, the money in a savings account, money market account, or certificate of deposit should be available for a wide range of uses. Yes, they are short-term deposits and can be withdrawn quickly, but typically the aggregation of such short-term savings doesn't fluctuate widely.
I do not think that short-term savings have to be idle savings.
cc0 says
The economics standard terms are "capital goods" and "consumer goods". Consumer goods are those that are consumed. Consumer goods are further classified as "durable" or "non-durable", although I think a durability scalar would be a more appropriate model.
Capital goods are not consumed, even though they are used and typically depreciate (wear and tear / obsolescence). Capital goods do not satisfy a demand (need or want). Instead capital goods are used to create either consumer goods or other capital goods.
At least that's what I remember from my macro-economics class twenty years ago. Of course, I didn't pay too much attention because I was distracted by some pretty girl at the time.
cc0 says
That I completely disagree with. The whole purpose of a banking system, at least one that is ran correctly, is to allow savings to be used as investments for increasing the wealth produce by an economy while allowing individuals a store of wealth for future consumption . If that function isn't fulfilled, then what is the purpose of banking at all? [Yes, I'm sure we can provide many sarcastic answers to that question.]
Yes, individuals will on a day-to-day basis deposit and withdraw huge amounts of cash. But the aggregate savings should change much more slowly. Granted, 100% efficiency cannot be achieved, but the system should still be way more efficient than a "spend everything as soon as you get it" mentality.
Essentially, our dysfunctional "debt as money" system attempts to serve the same purpose. But I don't think it works as well as "credit as money". Debt is essentially negative savings where you pull wealth from the future rather than storing it up in the present. I think America would be much better off with more savings and less debt.
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Dan8267 says
We're splitting semantic hairs, certainly, but if it's invested it's not saved. Back on our island, $1 saved is simply removed from the economy. $1 invested is money at risk.
Dan8267 says
I don't dispute this. Capital requirements on a new semiconductor fab are enormous. In the old days someone would form a corporation for the raising of water by fire or for the building of a fab and then sell shares to raise money.
Pretty much everything that's been done since those simple times has been done as a means to increase the velocity (flow) of money and discourage savings. The more liquid a market - I don't want to say efficient, but - the more productive it can be.
What hinders the acceleration of this flow? The removal of money from the system. The less there is money available, the less it moves (generally because of fear). What do we call removing money from the system? Savings. (There's also deflation, which is a separate thing but whose effect is similar.)
Now, I'm not saying that saving is bad, I'm just saying what it is.
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cc0 says
Agreed for the most part. One caveat though. Removal of money from a money supply is no worse than adding an equal percentage of money would be. In fact, if inflation has occurred, an equal amount of deflation would be healthy, and vice versa.
The goal should be to maintain a constant purchasing power of the money, i.e., the store of value represented by money should not change. As such the money supply should typically be expanded or contracted only in response to population changes and that change should be done in a manner that does not transfer purchasing power.
If this is the case, then money fulfills its purpose as
1. A medium of exchange.
2. A store of value.
3. A unit of accounting.
And that is what Benjamin Franklin referred to as "honest money".
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cc0 says
Quote: "30% of the kids in the Congo have dropped out of school to mine Coltan."
Coltan is used to make T-800+ endoskeletons. It's production should be banned.
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Dan8267 says
Interesting idea; that requires some thought. Removal of money from circulation is equivalent to the destruction of that money, which is deflation.
I can't comment on 'healthiness' at this time, but deflation in a debt based economy can be a very vicious circle. I suspect this deleveraging cycle is going to get very painful if Republicans have their way. Things start to get really complicated when you remove the value from money.
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cc0 says
Inflation, by definition, is an increase in the money supply. Rising costs are a possible effect of inflation.
Deflation, by definition, is a decrease in the money supply. Lower costs are a possible effect of deflation.
The media simply misuses those terms.
The distinction is important because the Fed likes to play the game of using inflation to balance decrease demand in a recession to ensure prices stay the same. However, such a balancing act is inherently unstable, like trying to balance a pencil on its tip, and ultimately the pencil falls to one side: either sudden, large price increases or decreases (usually the former).
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cc0 says
and this is exactly what has been accelerating in our economy.
The Miseans among us apparently don't understand that if mere monetary inflation isn't getting into the hands of the masses, there can be no price inflation, just reallocation.
China is sucking $300B/yr from our economy at the paycheck level. YTD, just the major oil producers have taken another $100B:
http://www.census.gov/foreign-trade/top/dst/current/deficit.html
In the famous words of Network, "The Arabs have taken billions of dollars out of this country, and now they must put it back!"
http://www.youtube.com/watch?v=zI5hrcwU7Dk
We tried patching this outflow of wealth from the toiling masses with the money from the housing bubble. That only worked as long as we were able to lower the cost of mortgage money and lower the underwriting standards of loans, i.e. until late 2006.
I don't know anything, but I think the honest way to fix this deflation is re-set FX with the rest of the world. Have the yuan triple to 2. Have gas cost $10/gallon to patch that $100B/yr outflow by cutting consumption to the bone.
But this fix brings its own dislocations. We're hosed no matter what we do I guess.
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Dan8267 says
I'm not sure why you're telling me this.
Dan8267 says
Because ... lower costs (via deflation) and higher costs (via inflation) are equal? I think you're trying to say that people's purchasing power are similarly eroded but it's not quite clear.
Dan8267 says
And vice-versa? ... Are you Helicopter Ben?
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What I'm saying is that although it would ok to temporarily change the money supply for a fix to a short-term problem, the money supply should be reverted back to the previous level quickly to avoid long-term ill effects. Hardly Bernanke's philosophy.
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Dan8267 says
:-)
Sorry, I find this quite amusing. I just ran the numbers for this week's foreclosure auction. In this county of about 1/2 million people, assuming all foreclosures are bank foreclosures and that they get the appraised value of their properties, the banks are going to lose almost $10 million.
Extrapolate this out a bit ... that's $500 million this year in this county. The state population is ~35 times bigger so let's multiply by 10 - in Florida alone the banks are going to lose $5 billion this year. Let's assume they're only leveraged 10:1 ... that's $50 billion worth of bank notes that have to be reconciled. Let's multiply this by 10 to represent the country -- that's half a trillion dollars worth of deflation (a/k/a "wealth destruction") this year alone.
gone. p00f
Oh, and I'm only counting the entities foreclosing. This means that those numbers don't include any secondary mortgages that are getting wiped out, nor any primaries if it's one of the secondaries foreclosing.