patrick.net

How does it work? How would you account for the drastically different cost of labor for each person?

Both a CEO and a janitor have 24 hours a day, but obviously the CEO will have more purchasing power.

Gold is much better as money.

The point is that money is an abstraction in a way that hours of labor are not. The CEO has no more hours in a day than the janitor does.

I think that if you convert what the janitor promised to pay as hours per house, it is more than he really has available.

And I suspect that the CEO promised to pay a similar number of hours for his house, and he also does not have that many hours left to work, and this is why jumbo loans are tanking.

Patrick,

Pardon me, I hold you in high esteem, but I see a few small flaws.

I like the way your thought process works: (Labor)Wages are money, Wages are a trade for time, so money is time. Which is to say that time is money or that time is labor, or labor is money. They are all economic synonyms.

However, I would like to point out that ANYTHING of value is "money" in the purest sense. In a pure barter system, goods and services take on the role of money. Indeed, how we value the sacrifice of another, or of ourselves is our perception of value.

However, "equity" is not money. Only when someone is willing to give money in return for a claim against an asset does "money" get created. That money "creation" can only be done in USD by a bank. There is no way to "leverage" our labor, unless you figure out a way to clone people with experience intact.

However, thinking of value in terms of time is too abstract because it changes from person to person and from time to time. Obama's time is probably worth more than mine. But, mine is worth more than a Hilbilly in Fontana. However, if that Hilbilly got an MBA and worked for Goldman Sachs, others might value his time as very valuable, while I find it personally worthless. Money (in the form of USD) gives us something concrete to barter with.

The personal value of money is relative. Ghandi would agree with that. I'm still seeking enlightenment, but at a higher pay grade.

Chuck Ponzi

Chuck, you have been vastly exceeded by Madoff. How do you feel? :)

I also think that labor is not money because of its relativity in value.

Peter,

Yeah, Madoff... I'm envious.

This country is great. Where else can you steal 50Billion dollars and be imprisoned in your luxury penthouse with servants and the home shopping network to spend what's left of your swindled money?

Oh, yeah, maybe being a senator and doing it as a free man?

Chuck Ponzi

re: hours for labor and not living long enough to pay the house loan -- the house itself is the collateral for the loan, not the number of hours worked. So when the 1st owner dies without having put in enough hours, the asset is sold and the next guy starts putting in his hours. Houses have a longer lifespan than the owners. So technically it doesn't matter how much you pay for a house as long as you can make the payments and you don't sell it before you die.

Also money/labor can't be directly correlated since some people get more money for an hour than others. Also some multiply their income by making money off other people's hours. And someone who does, say, research that can be sold to multiple parties can bill each party for the same hour of labor. Then there are people who make money off their hours as well as a product they sell, for instance a salesman that gets an hourly wage as well as a commission.

The money=labor may not be a perfect link (welfare, retirement pay, disability, rental income, and residuals) but it may have a practical value.

For example, we may see an increase in the number of people who will think about how long they must work to obtain some product. That is: "Is buying that sports car instead of the sedan worth an extra 2 years of my after tax pay?" or "Honey, I work a week every month just to pay interest on the DisasterCard balance, let's cut back."

Now that consumption will be fueled by savings and overtime instead of house ATM extraction, the labor value of money will become refreshingly apparent.

On the value of One Man's Labor: Both Lincoln and Marx had ideas about the value of Labor. But Lincoln had actually labored, so I think he had more valuable things to say.

There are different types of labor: Unskilled/Unexperienced, Skilled/Experienced, hard manual labor, easy labor, mental labor with education, etc. Each of these falls within a heirarchy of what we're willing to pay for them that is relatively static. A kid on his first job at MickeyD's isn't "worth" what a guy who has done high iron construction work for 20 years is, who might himself be "worth" what a mid or upper level executive at a big company is.

My dad taught me about beefsteak economics: I was working at Woolworths when I was 16. He had worked in a 5 and dime when he was 16. I was making Federally mandated minimum wage (I think it was $1.90 at the time). He had made minimum wage in his time, of 50 cents (I think-- might've been a quarter).

His hour of soft, unskilled, unexperienced labor bought him one pound of Sirloin. My hour bought me... One pound of Sirloin. Extrapolate to today and indeed, one hour's soft unskilled, unexperienced labor (counting all the employer paid SS and other wage taxes) comes in right at one pound of sirloin.

This is a reflection of how much it costs to produce basic needs of people. Even though we crank up the minimum wage to five times the current rate, all that will buy is a short period of possible good will, with basic necessities going up comensurately as they track the labor costs needed to produce them, followed by long periods of stagflation, as the hard-labor, skilled labor, and white collar types slowly get their raises to reestablish the realtive labor heirarchy that was broken by government fiat. And you get 500% inflation along the way.

What has skewed this picture beyond recognition in recent years has been the pushing of easy credit on the whole economy, which has allowed people to live several steps above where they would otherwise fall in the above heirarchy, and caused the cost of items to also move several steps up the heirarchy as well. I'm not against anybody living large, but at some point it has got to be paid for. We'll be doing that through extremely painful deflation, or extremely painful inflation, plus extremely painful taxation. Or all the above.

One way or 'tother.

MST,

I find your viewpoint fatalistic. None of us belongs in a hierarchy, nor are we destined to stay in that station our whole lives. Otherwise, we'd all be living in Ayn Rand's bizarro world. However, individualism has its place, albeit kept in check by protections to the common man. Swinging the pendulum the opposite way just as far accomplishes nothing.

Indeed, because of industrialization, we can all live above our birth-station, something the last 100 years has more or less proven. Those calling for a return to agrarian society because of the greed and avarice the last decade are barking up the wrong tree. Ideally, both for ur-capitalists and socialists alike (excluding Pol-Pot brand communists) would prefer to have reasonable disparity (enough for personal motivation) and increased prosperity. I still believe that's possible. Much of what the last 20 years has told us is that a strong graduated income tax can still produce fantastic growth with reasonable wealth disparity. When we veered off that course, we have a whole different ball game, and one I hope isn't punctuated by widespread social unrest.

Chuck Ponzi

TOB:

thanks, and indeed, very hard to quantify where a software engineer falls relative to a bridge engineer, relative to an engineering instructor at a medium-sized university. Can you imagine Congressthings trying to establish fixed relationships amongst the various subdisciplines? But that's the kind of thing they try to do all the time when they're rejiggering the economy.

But the larger overall point is that the labor matrix has one axis labeled skill and another labeled difficulty. (Add other dimensions with abandon, it doesn't obviate the point.) If your job is low on either or both, you will earn lower wages than someone whose job is higher on either or both. That relative positioning and compensation has stayed quite remarkably fixed, obviously for fundamental economic reasons. And for the same fundamental economic reasons, the lowest positions on the matrix will be paid less than a full "living" wage (i.e. can't afford their own house, have to share a rental, don't eat out at fancy restaurants, drive used cars, don't have the latest toys, etc.), and always have been. 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 you wind up loaning them money you never should have to make up for it, which enslaves them in the rotten position they have when they sign the contract.

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.