The Real News Network has the interview Economist: There is no debt crisis. Some of this is old news because the debt ceiling crisis is over for a while.  However, the comments about the U.S. debt are worth hearing again.

DESVARIEUX: But you do have those that say that long-term debt is not really in the interests of the country. I know, you know, you cannot compare the United States Treasury to the way a household operates, but at the same time, in the long term we shouldn’t really be accumulating more and more debt. What set of policies do you think would most effectively lower the nation’s debt?

EPSTEIN: Well, one really has to look at this more carefully and see that debt is not really the issue, because after all, debt is just one side of the balance sheet. There’s the liabilities. That’s the debt. But there’s also the assets that you get for the debt.

The big problem for the United States is not the amount of debt that it owes, but it’s the way that it’s been investing in social assets–in education, in infrastructure, in all the things that can make the economy develop properly. There hasn’t been enough investment in green technology and so forth. So we really should be focusing on the investments in the real economy, in the infrastructure and the education. And oftentimes those kinds of investments, they pay for themselves in terms of more and more revenue.

But as the economy grows, the amount of debt relative to the GNP goes down anyway. And I think most economists, including at the Congressional Budget Office and elsewhere, realize that this whole debt is a secondary issue.

So what is the issue? The issue, from the perspective of the Congress, financed by big billionaires, the right-wingers that are financed by big billionaires like the Koch brothers and others, their goal is to completely dismantle those aspects of the government that threaten them. And that includes threaten them with higher taxation, threaten them with environmental regulations, carbon taxes, etc. They want to paralyze the government so it’s not able to impose those kinds of things.

And this debt ceiling fight has gotten out of control. They can’t necessarily control the system, and it’s led to a very dangerous impasse.

I think it is time to start talking about what is in this New Economic Perspectives article, How to Talk About Debt and Deficits: Don’t Think of an Elephant*

Here is a quote from a report prepared for publication by the St. Louis Federal Reserve that makes the point that we all need to understand:

The article even has a link to a YouTube video of Alan Greenspan making a similar point.

There is nothing to prevent the federal government from creating as much money as it wants to make.

To grasp the import of Alan Greenspan’s confession, it may help to read my previous post, Fractional Reserve Banking Mechanics. In my ordinary bank example, I said that the bank gave the borrower some physical bills. This was just so that you could keep track of the physical bills and see that they actually existed somewhere to cover what each person thought they had. The bank could just as easily have credited the borrower some money in his or her checking account. If the borrower then gave a check for the money to someone in order to buy something, the seller could have deposited the check in the business’s bank account. The banking system would be happy to tell the business that it had added the money to its account, all by transferring the idea of who had the money electronically. No physical bills need ever change hands.

If you grasp how a plain old bank manages to create money essentially from nothing, then you can see how much easier it is for the Federal Government to create its own money. With the advent of electronic transfer of “money”, the Federal Government does not even have to physically print money. All it has to do is electronically credit someone with the money. As long as almost everybody believes the money is there, and that the money people think they have will actually buy what they expect it to (and experience confirms their assumptions), then the system runs quite well.

As in the example in the previous post of how the Federal Reserve Bank created trillions of dollars to keep the banks afloat during the crash of the mid 2000s, you should be able to see how it would be possible for the Federal Reserve Bank to create enough money to pay the debts of the Federal Government.

If you have not thought of this before, you may be able to think of lots of circumstances where the creation of such money could become a problem. However, only some of the scenarios you come up with will be actual problems. Other problems just resolve themselves if you think about the reality hard enough, or you have someone explain to you how it resolves.

To make rational decisions, you really have to figure out which ones are the real problems, and which ones are just ghosts of your lack of familiarity with how money actually works on a large scale.

When even President Obama goes along with the fiction that we have a current debt problem, it is time to start getting seriously educated on what is and what isn’t a problem. Hint: The current debt is not the problem. The future debt from uncontrolled health care costs is the problem whether it is debt from the Government or debt from private individuals. (Read the report that is linked to Greenspan’s remarks above).

It is a real danger when the President gives up trying to educate the public, and thinks he can just harness public ignorance for his own benefit. It is guaranteed to blow up in his face, just as it has many times in his Presidency already.

How to Talk About Debt and Deficits: Don’t Think of an Elephant*, is really just the beginning of an understanding of this whole topic.

To understand some future blog posts, you are going to have to understand some of the mechanics of the fractional reserve banking system.

I think I have come up with a simple enough example that allows you to see where the money goes among people, banks, cash, and debt.  In this simple example, we can even track the individual dollar bills.  I have chosen the numbers to make the math very simple.  It all still holds when you scale it up to large amounts of money and down to a more realistic reserve requirement.

Start with $16 in one dollar bills from the U.S. mint with serial number $#1 through $#16. We need 4 banks numbered B1 through B4. 5 People number P1 through P5.

For simplicity, let’s say the reserve rate is 50%. Let’s also say that dollar bills are not divisible.

P1 has 16 dollar bills that he deposits in bank B1. B1 keeps the dollars $#1 through $#8 as a reserve. It then lends $#9 through $#16 to person P2.

Person P2 has a debt of $8 and cash of $8 which he deposits in bank B2. Bank B2 keeps dollars $#9 through $#12 as reserve, and lends $#13 through $#16 to person P3.

Person P3 has a debt of $4 and cash of $4 which he deposits in bank B3. Bank B3 keeps dollars $#13 and $#14 as reserve, and lends $#15 and $#16 to person P4.

Person P4 has a debt of $2 and cash of $2 which he deposits in bank B4. Bank B4 keeps $#15 as reserve and lends $#16 to person P5.

Person P5 just keeps the dollar because banks do not accept accounts of $1 because they cannot lend out part of the indivisible dollar.

This can all be presented visually by a number of charts from a spread sheet.

In this example, at the end of 9 days as you follow the circulation of money through the system, you see that there appears to be $31 of cash in the system even though there are only $16 of U.S. Money created by the U.S. mint.

In other words the Fractional Reserve Banking system has just about doubled the amount of cash given a reserve rate of 50%. The multiplier on the amount of cash created goes up as the fraction of reserves required to be held goes down. If the reserve requirement were 10%, the multiplier would be close to 10.

Don’t be blinded to reality because this example has most people leaving their cash in the bank. If people took some money out of the bank to buy something, the money would end up being deposited somewhere, the effect would be the same, just the math and keeping track would be more complicated.

The power of this scheme becomes really obvious when you consider that a bank is taking deposits from large numbers of people. The bank holds only a fraction of that money in reserve. Under ordinary circumstances, not all depositors will want to turn all their deposits into cash all at the same time. If the normal number of depositors want take cash out of the bank, the reserves accumulated from all the depositors is enough to cover the request. No depositor has to be concerned that the bank is only holding a fractional reserve.

When some extraordinary circumstance arises where a bank’s customers want more cash than the bank is holding in reserve, the Federal Reserve Bank can supply the cash necessary to keep alive the fiction that the bank had the depositor’s money all the time. Even in some extraordinary circumstances, the money the depositors took from one bank will find itself deposited in another bank and the system can remain stable.

In the extraordinary extraordinary circumstance, where the request for withdrawal is more systemic than just a single bank, the Fed can just create enough U.S. Money and feed it to the banks to stabilize the system, as it did in the financial crash of the mid 2000s.

Any questions or comments? Post them on my Facebook mirror of this blog article.

Crooks and Liars has the article Fact-Checking Fox: What Real Journalism Looks Like. The article starts with the following:

Ashley Dionne, a recent guest on Mike Huckabee’s show, claimed that her insurance premiums would jump from $75 per month to $319 per month for her family. She proclaimed the act to be the “Unaffordable Care Act” and went even further, claiming her future and that of her children had been ‘raped.’

Unfortunately, someone forgot to mention to Ashley that her premiums were offset with subsidies, so she would really pay $223 per YEAR as well as receiving assistance with copayments. Oops.

The story goes on to debunk all the other scare tactics used by the Ted Cruz’s of the world.  I was wondering if anybody would come along to put the lie to what the Republicans have been saying about the supposed harm that the ACA is causing.

I suppose it is true that anything as complicated as buying health insurance could be mistakenly interpreted by some customers.  So it may be true that if you get your noise from Faux Noise that the ACA won’t work for you.  Perhaps some of the other media will use their powers to clear up any misconceptions people might have.  For the people who get their news from these sources, the ACA will work for them.  I’d just love to see a study eventually done that shows just this, the ACA has a disproportionate failure rate for people who get their noise from Faux Noise.

The Real News Network has a multi-part interview about American Exceptionalism. As of this writing, only three parts have been aired.

When President Obama spoke at the United Nations, he again said (’cause he had said before) that he considered America an exceptional country. He called it “exceptional”. And I’ll play that quote for you in just a few minutes. But, of course, he’s not the first one to have said that. This idea of American exceptionalism, according to many, goes to the very heart not only of American foreign policy, but of American identity itself.

American Exceptionalism and US Imperialism – Pt1

Obama Embraces American Exceptionalism – Kuznick Pt 2

American Exceptionalism: Doing Bad Things for “Good Reasons” – Kuznik Pt3

The worst part of this might be President Obama’s modeling of doing bad things for good reasons. Perhaps he did learn something from the bad reaction he got when he tried to fight the ingrained idea of American exeptionalism. What he may have learned is that it is very hard to go against what people firmly believe, so it is best to try to harness their ignorance for good purposes. Perhaps the President achieves some temporary victory from this sly trick, but the eventual blowback will be devastating. Then the next person to come along and try to educate the people will inevitably learn the same lesson that Obama did. Maybe this is what causes the decline and fall of great nations.

2013/10/20

Here is the last part of the series.

Does American Might Prevent Global Chaos? – Kuznick Pt 4.

KUZNICK: Except that people are learning the lesson of that. If you look at the recent statements by Robert Gates–Gates is one of the architects of the American empire for decades. First he screwed up the intelligence agencies. He was behind the reform of the CIA. And he’s a real planner of the wars and empire for a long time, the head of the CIA, head of the Defense Department. He came out a couple of years ago saying that if an American secretary of defense advises a president to invade another country in Asia or Africa or Latin America, he should have his head examined. But he came out more recently saying after Afghanistan, Iraq, and Libya, that anybody who supports another American military intervention, as in Syria, is crazy.

He says that because what he realized that other people realize is that we create the chaos. He says, we don’t ever know what the unintended consequences are and that what results from these interventions is chaos. We’ve–look at the chaos that exists now in Iraq. Did we leave that a peaceful place? Of course not. So people might make the assumption that what we’re doing is better than chaos, but the reality is we create chaos. We don’t know what the ramifications are. We don’t understand the situations. George Bush doesn’t know the difference between Sunnis and Shiites when we go and start this kind of “crusade,” which he called it.

The Real News Network has the video interview The Tea Party and the Suppression of the Left.

WOLFF: I think the Democratic Party bears a major responsibility for the success of the Tea Party. And when they berate the Tea Party and denounce it, there’s something peculiar, since they’re so complicit in this situation. You’d look long and hard in the history of the Democratic Party over the last 50 years to find a word of criticism of capitalism as a system. The Democratic Party avoids it. The Democratic Party joins in pretending that a political solution is adequate to deal with an economic system that has now collapsed twice in the last 75 years.

You know, I’m part of economics profession. We didn’t as a profession foresee this crisis. We didn’t imagine it would cut so deep. We didn’t imagine it would last so long. And we didn’t understand that it would resist the conventional fiscal and monetary policies that we’d been telling our students are more than adequate to manage capitalism.

Sarcasm Warning – there is some sarcasm in my comments below. If you are unable to detect it, you might be misled by what I am saying.

Well, I still hold onto some of the left wing economics I was gullible enough to believe when I was taught it in college. Apparently President Obama was not indoctrinated enough in his college career. He was educated in the age where the anti-left propaganda began to become dominant.

Sarcasm Warning rescinded.

Because of the strength of the political opposition and the lack of his own commitment, President Obama accepted a fiscal stimulus that was only about one-third the size that was needed. Economists were warning him of the inadequacy at the time. This weak stimulus was wonderful for the Tea Party financial backers exactly because its partial success saved them from a depression like the one that drove them from office in the 1930s, and its inevitable failure to restore full employment could be used to discredit the very idea of stimulus.

I think Wolff’s accepting the blame for the failure of the Economics profession is also playing into the hands of the Tea Party.

It is only the faux solution of the far right wing economics of Milton Friedman that ever thought that monetary policy as exercised by the Fed recently that could ever be a solution to the current economic problem.

All the economists who were onto Friedman’s deception have said that in this world of heightened economic inequality and consequent disappearance of consumer demand, monetary policy is like pushing on a string to get the economy moving. The more you push on the string, the more tangled it gets, but the economy is not moved.

If and when the economy does start to turn around, the frantic effort to pull the slack and tangled monetary string taut again may be impossible to do fast enough.  Let’s just hope that Janet Yellen is up to the job.

For those who are into engineering analogies, you might want to think of bang-bang controllers. Maybe good for furnaces and water heaters, not so good for the economy.

The difference between a large tub of water and an economy is in response rate. The water changes its temperature slowly through the range of the bang-bang controller. The economy starts to change slowly, too, with bang-bang controllers. However, once the economy reaches a tipping point, it can start to react faster than anyone imagined. As Taleb would say, one system is linear and the other is non-linear.

Rand Paul, Ted Cruz, and Marco Rubio — Tea Party darlings and aspiring presidential candidates — all voted to shut down the economy.

This is from an email I received from the Democratic Party.

The New York Times has the story A Regulator Cuts New Teeth on JPMorgan in ‘London Whale’ Case. The agency is the Commodity Futures Trading Commission.

The agency’s authority to bring such a case traces to Dodd-Frank. For years leading up to the law, the agency was hamstrung in its pursuit of market-manipulation cases. Under existing laws, it had to prove that a trader intended to manipulate the market and successfully created artificial prices.

Even when cases were filed, they rarely panned out. In fact, according to Mr. Chilton, the agency has successfully litigated only one manipulation case in the agency’s 38-year history.

But under Dodd-Frank, the agency must show only that a trader acted “recklessly.”

“In Dodd-Frank, Congress provided a powerful new tool enabling the C.F.T.C. for the first time to prohibit reckless manipulative conduct,” David Meister, the agency’s enforcement director, said in a statement on Wednesday.
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Homing in on one day in late February 2012, the agency’s order exposed a series of questionable trading practices at the bank’s chief investment office in London.

The traders, seeking to minimize losses and vowing to “defend the position,” sold more than $7 billion of credit default swaps to hedge funds and other traders on Feb. 29.

It was a “staggering, record-setting volume,” the trading commission said. The sales, the trading commission added, “accounted for more than 90 percent of the day’s net volume traded by the entire market.”

The section of Dodd-Frank bill that was used in this case was championed by Senator Maria E. Cantwell.  It all started when women got the right to vote 1n 1920.  Elizabeth Warren is not alone in pushing for reform.

The first time the bear tested the bird feeder pole on October 12, she found that it was too hard to bring down to her level. After 4 days of consulting with more experienced bears, she came back. This time she had it on the ground in no time. Sharon didn’t actually see her bring it down, but she did hear it.

We were going to stop feeding the birds after they emptied the feeder, but the bear took care of it for us.

I guess I’ll have to go out there and do a failure analysis.

2013/10/17

Begin failure analysis.

Looks like multiple points of failure

Squirrel baffle may be beyond repair.

Pile of broken pipes

Iron pipe fittings just broken off.  What am I going to do with four concrete pilings of about 150 pounds each and four feet into the ground?