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Posts Tagged ‘money’

McArdle relies on Tribe, gets 14th amendment logic wrong

July 10, 2011 4 comments

Now we have people refering to Tribe as the ultimate smackdown of the 14th amendment argument.  Megan McArdle – who is nearly always wrong as far as I can tell – gets on the train headed down the tracks the wrong way.

We pay a huge price for monetary ignorance.

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Not understanding how money works creates Constitutional Problems

July 8, 2011 26 comments

The 14th amendment argument has moved from the fringe to the mainstream.  In doing so, its highlighted the fact that understanding how money works is crucial to the proper execution of our government.

Laurence Tribe says the debt ceiling is perfectly constitutional.  Why?  Here is the core of his argument:

“This argument goes too far. It would mean that any budget deficit, tax cut or spending increase could be attacked on constitutional grounds, because each of those actions slightly increases the probability of default. Moreover, the argument is self-defeating. If it were correct, the absence of a debt ceiling could likewise be attacked as unconstitutional — after all, the greater the nation’s debt, the greater the difficulty of repaying it, and the higher the probability of default.”

Note that his misunderstanding of money drives his entire argument that the debt ceiling is constitutional.   He clearly hasn’t read solvency and value, insolvency and debasement.    The U.S. is never in danger of insolvency.   We cannot go broke.  If you doubt that article, you need to know the the mainstream understanding of Government Budget Constraints is based on a belief in ghosts.

So his arguments based on the possibility of the U.S. not paying its debts are wrong.  The first argument is wrong because spending more, or lowering taxes does not slightly increase the possibility of default, because we cannot default.  The second argument is wrong because it is not harder to repay the debt if the debt gets higher for the United States.  The 14th amendment argument isn’t self defeating.

I hate to call a prominent Harvard professor clearly and undisputedly wrong.  But he is. Lawrence Tribe is wrong. He doesn’t understand money and sovereign money, so his legal arguments and theories are incorrect.

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Welcome MMT Fans!

June 20, 2011 6 comments

Thanks for stopping by from Warrens Place!

This blog has lots of MMT thinking on it.  I was inspired by Warren Mosler and the other thinkers in MMT (like Scott Fullwiler and W. Randal Wray)  to do some thinking of my own.

I truly believe the world can be a slightly better place if MMT was widely accepted as the way money works.

Here is a list of some of the cool things that have happend on this blog, if you care to take a look.

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Bitcoin hacked, proving once again it’s not real money

June 20, 2011 4 comments

I have a friend who passed along this interesting bit about Bitcoin.  Bitcoin is the private “money” that’s getting headlines everywhere.

Huge Bitcoin sell off due to a compromised account – rollback

There are huge problems with bitcoin.  Security is just one of them.

Rufus Blooter  points out bitcoins have serious pricing problems.  Depending on where you trade your bitcoins, there are rather large differences in price.

Here is his post:

“Checkout the markets. What’s the catch? Are these things fungible or not? If so, why would I be able to cross bid/ask everywhere? I must be missing something, because someone with even the most rudimentary trading skills should be in there ripping everyone’s faces off.”

I suspect that these coins are not fungible, because my 9 year old son would be able to rip the faces off of these spreads.  The bitcoin is probably closer to a fad than a real form of money.

 

 

 

 

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Euro cannot get weak enough to solve Greece’s problems due to German export machine

June 18, 2011 7 comments

If you haven’t seen Warren Moslers comments on the Euro over the last few days, they are a must read.

Greece on the Slippery Slope

Thoughts on the Euro

Germany has built a significant part their economy around exports – this was an industrial policy decision.  When the Euro weakens, Germany grows very rapidly. France also has a significant export sector, even if it is smaller than Germany’s.

We’ve seen this in the recent past when they posted the 9% quarter in Q3 2010. The lowest level of EURUSD was in Q2, so Germany got orders at low EURUSD levels in Q2, and filled them in Q3.

The euro seems to have a “natural” lower limit due to the German export machine.  Once the EURUSD trades below 1.30 or so, German growth becomes attractively large.

I find it difficult to imagine the EURUSD much below 1.20 for extended periods. Simply because if Germany is growing at 10% plus per year, their equity and debt markets become extremely attractive.  This draws capital flows into the euro, pushing up the exchange rate, ect…

Usually, a weaker currency “cures” debt problems through a combination of inflation and export driven economic growth.

But Greece does not have a large export sector – at least not to the same degree that Germany does.  A EUR at 1.2000 does not help Greece to anywhere near the same extent it does Germany.  The euro would need to be much lower to spur export driven growth in Greece or Portugal.

And we’ve seen serious problems with the inflation argument.  There simply does not seem to be that much inflation in the world.  5% inflation in China is not enough to make Greece’s problems disappear.  Greece would need an extended period of 5% inflation in Greece to solve their problems.  The ECB would never allow this level of inflation.

So the usual cure – weakening currency drives inflation AND export driven economic growth – does not apply to Greece.

The euro wont’ get weak enough to spur their economy because Germany is way better at exporting.    Inflation isn’t high enough to make the debt problem smaller on any near term time scale.

So it appears the only way for the problems in Greece to go away is a bailout.

This is what happens when you have a monetary but not fiscal union.  It seems to me like the bailout payments would more accurately be classified as fiscal transfers – as though the economics and accounting dictate there MUST be these fiscal transfers even though there is no fiscal union.

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First MMT Talking Point Identified!

June 15, 2011 Comments off

Mike Norman has a great new quote up from Warren Mosler.

“All government spending is printing money. And all taxation and spending reductions are ‘un-printing’ money.”

I think this qualifies for our first talking point over here at the Traders Crucible!  You’ll see up on top, right in front of the Wall of Shame, the new Page “Talking Points.”  This page will be a warehouse of ways to talk about how we can fix the economy with better understanding of how it works.

Over time, this page will become a good resource for the entire MMT community.  We need good ways to convey the messages, ways that are truthful, easy to understand, and convincing.

I thought about appropriating about 80% of Mike Normans recent Television interview – it was that good.

The TC Rule for Monetary Policy [Updated]

April 15, 2011 10 comments

I woke up this morning and had a bit of time to thing about a fiscal policy rule for MMT.

c(u-u) + (i-i) + f*Population Growth = %G [Update: This is %G Deficit]

Where :

c(u-u) is Okun’s law, relating the change in GDP to change in unemployment.  According to most people, c is about 1.8 and (u-u) is the difference between the “natural” rate of unemployment and current unemployment.

(i-i) is the difference between the current core inflation rate and the target inflation rate

% Population growth is for the entire currency area – we might want to include China in this area given the current policy of China.  f is a multiplier, set to 1 for now.

Note this rule also spits out projected rates of inflation.   %G is the target rate, but we know the actual rate of %.   The difference between the two should be the observed inflation rate.

What do you all think?

[Update 6/21/2011:  I expand the idea behind the rule to include where to spend the money.  Hint: Payroll tax Cuts!]

[Update: probably needs to be some adjustment for spending multipliers]

Update 4/17/2011: More extensive yet incomplete thoughts here.]

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