When there are discussions of which model of the economy is “true”, I like to keep one particular analogy of the economy in mind.  It is an analogy with physics and the balancing of forces.

Donald E. Simanek has a picture in his article S-1 VECTOR ADDITION OF FORCES that is a useful starting point to understand my view.

In the above picture we see a balance of four weights of equal size.  See if you can use your imagination to expand this picture to millions of weights on millions of strings arranged at millions of angles on the above balance wheel.  You can look at any one of these strings with weights on both ends as a single model of one of the forces in the economy.  Whether or not that string tilts the balance wheel toward one side of the other  surely depends on the sizes of the weights on both ends of that string.  If these weights dominate all the other weights in size, then measuring the size of the weights on this particular string will tell you which way the wheel tilts.  However, if the weights on this particular string are very small compared to the other weights, then they will have very little impact on the tilt of the wheel.

There are even more complicated problems about the small  difference in weights in a set of very large weights, but we don’t need to get into that to understand the issue.  When you discuss systems involving people, as opposed to ones that are only composed of inanimate objects, then there are even more complications which we don’t need to consider here.

Even if the weights you are  concerned with don’t change much, all the other weights can be undergoing huge changes.  If you think your particular economic theory explains all economic behavior in all possible circumstances, then you will be mystified by real world behavior which varies wildly even when the parameters you measure hardly change at all. In another circumstance, the factors you measure may change wildly, but the behavior of the system doesn’t change much at all.  That could be because the sum of the other weights and their changes are much larger than the changes in the weights you are looking at.

When you study any particular economic theory such as MMT (Modern Monetary Theory), you have to consider the circumstances under which the changes in the economic elements of the theory can have large impacts on the economy and when they are unlikely to have much impact.

I think a lot of arguments among theorists and bystanders have to do with not understanding when a theory is important to apply and when it  isn’t.  When arguing against a theory, it is important not to think that behavior of the economy under circumstances where the theory is unlikely to have much impact become a valid argument against the theory.  You shouldn’t assume that the people proposing the theory are unaware of the limitations of their theory, unless they explicitly demonstrate their lack of awareness.

When arguing for a theory, it is beneficial to mention the circumstances that must exist for the theory to apply.  It helps people to get in the right frame of mind to understand your theory.   People will not have a host of subconscious thoughts of where your theory does not apply in history, if you limit the explanation to be clearly appropriate only under the right circumstances.

Few will take your explanation into account when they try to debunk your theory, but you can always remind them of what you said when they get away from the area of applicability of your assumptions to prove that it is a bad theory.

When I originally wrote this article, I made the cryptic remark:

When you discuss systems involving people, as opposed to ones that are only composed of inanimate objects, then there are even more complications which we don’t need to consider here.

Today, I made a blog post that explains that remark – see Soros: General Theory of Reflexivity

Occupy Democrats has the article Watch: Bernie Sanders Epically Shreds the ‘Immoral’ Republican Budget.

In this video from today’s Senate hearing, a passionate Bernie Sanders unloads both barrels on the immoral Republican budget, listing the many ways that it does “exactly the opposite” of what the American people think needs to be done to rebuild the American middle class.

Here is the video.

Thanks for Bernie Sanders’ saying this, because it leaves me speechless.

Not that this will settle any arguments, but it is “interesting” to see who the Federal Reserve Bank thinks of Who owns the Federal Reserve?

The Federal Reserve System fulfills its public mission as an independent entity within government.  It is not “owned” by anyone and is not a private, profit-making institution.

As the nation’s central bank, the Federal Reserve derives its authority from the Congress of the United States. It is considered an independent central bank because its monetary policy decisions do not have to be approved by the President or anyone else in the executive or legislative branches of government, it does not receive funding appropriated by the Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms.

However, the Federal Reserve is subject to oversight by the Congress, which often reviews the Federal Reserve’s activities and can alter its responsibilities by statute. Therefore, the Federal Reserve can be more accurately described as “independent within the government” rather than “independent of government.”

I wonder if Rand and Ron Paul know of this?  If they do know, do they care?  Even if they know and care, they will still argue about what this means.  I only use the Pauls as representative of the people who argue this.

Someone is bound to say that the private member banks own shares of the Federal Reserve Bank, and thus they own it. So here is the last paragraph from the Federal Reserve’s document.

The 12 regional Federal Reserve Banks, which were established by the Congress as the operating arms of the nation’s central banking system, are organized similarly to private corporations–possibly leading to some confusion about “ownership.” For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, 6 percent per year.

I can imagine all the “Yes, but …”s gurgling through the readers’ minds. My take on the meaning of this second excerpt is that the “shares of stock” are more like tickets the banks have to buy if they want entry into the system. It gives the banks who buy them certain privileges and benefits, but it doesn’t give them ownership. When you buy tickets to Ringling Brothers’ Circus, do you think you own the circus?

There are other links in the document, but the above two excerpts are all the explanatory text in it at the time of writing this post.

See my subsequent post Bernanke: “The Fed will do whatever Congress tells us to do.”

I received an email from Elizabeth Warren, pretty much in rebuttal of what the President said, see my previous blog Obama Says Elizabeth Warren Is ‘Wrong’ on Trade.

For all the corporations and their lawyers who have written sections of the TPP that we are not allowed to see, I wonder if the President would like to tell us how many labor activists, environmentalists, and other counterbalancing groups have been allowed to write sections of the TPP. If someone asks me to sign a blank check, I always say “No” in the most emphatic terms I can. If you want me to sign something, you’d better show me what I am signing, give me a chance to read it, and let me consult with my lawyers.

The response “but you can trust me” just makes me more suspicious. Why would the President trade his credibility for this “trade” deal?

Time Magazine has the article Obama Says Elizabeth Warren Is ‘Wrong’ on Trade. This article is about an MSNBC show that had a panel discussion about the TPP (Trans Pacific Partnership) that included President Obama.

“Chris, think about it,” Obama responded. “I’ve spent the last 6½ years yanking this economy out of the worst recession since the Great Depression. Every single thing I’ve done from the Affordable Care Act to pushing to raise the minimum wage to making sure that young people are able to go to college and get good job training to what we’re pushing now in terms of sick pay leave … Everything I do has been focused on how do we make sure the middle class is getting a fair deal. Now I would not be doing this trade deal if I did not think it was good for the middle class.”

“And when you hear folks make a lot of suggestions about how bad this trade deal is,” the President continued, “when you dig into the facts, they are wrong.”

Chris Matthews kept asking the President why his fellow Democrats are saying these bad things about TPP.  Every time the President indicated that he didn’t know why, I kept wondering why he doesn’t talk to these people and ask them why.  From the commentary by Chris Matthews, he seems to have had shows that have only critics of TPP, and this show is only supporters of TPP.  If the two sides cannot understand what the other side is talking about, wouldn’t it be better to have a show where people from both sides talk to each other?

Knowing what a bill of goods Onama’s advisers were able to sell him on going easy on criminal Wall Street executives, it wouldn’t surprise me that he is falling for another set of equally bad advice.  MSNBC would do the whole world a great service by getting both sides to talk to each other in front of the viewing audience.  I don’t need a debate.  I want to see an arbitration.

Watch the MSNBC panel discussion with Obama here. Part 1 and Part 2.

Nation Of Change has the article Chelsea Manning and the Deepwater Horizon Killings by Greg Palast.  The conclusion of the articel was:

As I see it, the State Department officials who withheld BP’s blow-out secret are as culpable as the oil company in the deaths of those 11 workers on the Deepwater Horizon. You can say that the men who died on the rig were victims of the corporate-government enslavement of information, martyrs to official secrecy.

To see the connection to Chelsea Manning, you’ll have to read the article.

I won’t buy Exxon/Mobil gasoline nor their stock because of the Exxon Valdez disaster in Alaska.  I wonder what this says about my Chevron stock?

It is bad enough that I hold the stock after posting 500 Attend High-Profile MIT Divestment Debate.

Ed Markey posted on his Facebook page about his press relelase Markey, Franken, Senate Colleagues Call on Federal Regulators to Block Massive Comcast-Time Warner Cable Deal.  You can join the conversatio on his Facebook page where he said:

The Comcast-Time Warner mega merger would give Comcast too much market power and lead to fewer choices, higher prices, and even worse service for consumers in Massachusetts and across the U.S. I joined with Senators Al Franken, Senator Ron Wyden Bernie Sanders, U.S. Senator Elizabeth Warren & Senator Richard Blumenthal in urging DOJ & FCC to take a stand for U.S. consumers and businesses & reject the Comcast-Time Warner massive merger.

We in Sturbridge have been assuming the deal would go through, and as a result Comcast would take over for Charter here in Sturbridge.  Maybe we don’t have tp assume it  is a fait accompli.

Pragmatic Capitalism has the paper A Critique of Modern Monetary Theory (MMT).  The introduction states the following:

Neochartalism, also known as Modern Monetary Theory (MMT) is an interesting and relatively new arm of Post+Keynesian Economics (PKE) that has developed in recent decades and has become quite popular in the last few years largely on the internet.  As an arm of PKE there is much that is correct within MMT, but there are also some newer contributions made by the “neochartalists” that render the theory flawed and inapplicable to the modern monetary system.  Although I find that MMT is incomplete, it is important to note that their description of the monetary system is, in my view, superior to the neoclassical models that tend to dominate modern economic discourse.  I hope this critique will be viewed as a constructive criticism and not an attack on MMT.

A Google search will find you this definition of chartalism.

Chartalism is a term derived from the Latin word ‘charta’ meaning a ticket or token. Chartal money is the token for value, while metallist money is the thing of value itself. Precious Metal Viewed as Money.

I have only read 11 of the 73 pages of A Critique of Modern Monetary Theory (MMT).  I am not sure of what I make of it yet, but other readers of this blog might want to have their own go at it.

I stumbled upon this paper as I contemplated the possible wealth effects mentioned in the article of my previous post Nobel Prize Winner Robert Merton Slams Fed for “Negative Wealth Effect” Policies.  I am nowhere near settling the issue, but I will try to describe what that issue is.

My epiphany on the wealth effect came about when considering how the Fed can get out of its low interest policy regime. If it raises interest rates, then the economy collapses. If it keeps interest rates low the economy is no longer being stimulated by a policy that has lost its effectiveness. My first thought is that a massive government stimulus spending plan will have to take place at the same time the Fed raises interest rates. Then I started to think about what is really being taken out of and put back into the private sector by the combination of these policies.

I got to thinking about the current state of inflated assets (stock market) and the impact of deflating that bubble. The bubble exists only because people value their stocks at mark-to-market prices. The wealth doesn’t really exist, but people think it does and they behave accordingly. If the stock market collapses and assumed wealth disappears, the government hasn’t actually taken anything out of the private sector pot and put it into its own pot. And yet, there are huge effects on the economy. So it is true that the accounting of “outside money” is not the whole story. “Inside money” is important, too.

The MMT assumes that “inside money” is less powerful than “outside money” because each creation of “inside money” creates a balancing debt on someone’s books.  The trouble with mark-to-market accounting of the value of your stock holdings is the creation and destruction of notional money without any balancing debt creation or destruction.  I am using notional money to mean money that you assume you have because of mark-to-market accounting, but this money only exists if you could sell all your stock instantly at the current market price.  For small  investors this might almost be true sometimes.  If large investors or if many small investors make a similar buy or sell decision, then the mark-to-market price means nothing.  The act of changing your stock into actual money changes the market price. You will only get the amount of money for your stock as you will find a willing buyer will give you.

What I am trying to research is what all this means in practical and in theoretical terms.  This issue has been argued for thousands of years and is the subject of many PhD theses, books, articles, and Nobel Prizes.  So it’s not that I expect to come up with a definitive answer.  The point is to come to a better understanding from just looking into the question.

April 22, 2015

Now that I have read some more of the critique, I see a pattern developing. The author, Cullen Roche, seems to read into MMT extreme positions that I don’t think the proponents of MMT have ever taken, and then he criticizes those imaginary positions. There may be a few valid criticisms in what I have read so far, but most of it is knocking down a strawman that is the sole creation of Cullen Roche.

I think I will have to search elsewhere for what I am seeking. I am going to try to look at the composition of our money supply to see how much is outside money and how much is inside money.

Naked Capitalism has the story Nobel Prize Winner Robert Merton Slams Fed for “Negative Wealth Effect” Policies.  This post is a discussion of the Pensions & Investments article Monetary policy: It’s all relative by Robert C. Merton and Arun Muralidhar.

The Naked Capitalism article starts with the explanation:

Nobel Prize winner* Robert Merton and Arun Muralidhar have charged ZIRP and QE happy central banks with economic malpractice. One of the main justifications for low interest rates is that they create a “wealth effect” by elevating asset prices. People allegedly feel richer and spend more, stimulating growth.

As we’ve pointed out, the first central bank to try the bright idea of lowering interest rates to spur consumption was Japan in the late 1980s. We know how that movie ended. Japanese banks and companies engaged in what was then called zaitech, or speculation, funded by being able to borrow 100% against urban land.** The result was to massively inflate already-large commercial and residential real estate bubbles, and to funnel Japanese cash into largely misguided and/or overpriced foreign investments.
.
.
.
Super low interest rates lower incomes to asset owners, producing what they describe as a “negative wealth effect”. The Fed seems to think that retirees and others who live mainly off their assets will happily eat their seed corn, um, liquidate some of their capital gains to make up for the loss of income. Instead, people in that position who come up short most often curb spending.

As a retiree who is managing my own investments just as Merton and Muralidhar describe, I can attest to the fact that I am behaving just as they say I should.  Though I have had a good  boost in my net worth, my income has not gone up by much  since the crash of 2007-2009.  Perhaps Merton and Muralidhar are not devotees of the newsletter Investment Quality Trends.  IQT’s methods do extract a little rising income out of the  current situation. without eating into your principle.  As I mentioned above, both my principle and income have increased since the crash, although the income is way down from the pre-crash level and my net worth is above the pre-crash level.  I have adjusted my spending in response to my new level of income.

I have since realized that no matter what my dividend income is, I should limit my expenditures to no more than 5% (maybe it is 4%) of my invested assets.  According to historical performance, that level of spending should be sustainable pretty much forever.  I have modified my investing goal from what used to be just maximizing my investment income stream, to a mix of capital appreciation and investment income, where the income doesn’t have to be more than about 5%.  The rest can be capital gains.  If I manage income higher than 5%, I just reinvest the excess instead of happily spending it.

If You Only News has the article Hillary Clinton’s Answer On Abortion Leaves ‘Pro-Life’ Senator Speechless (VIDEO).

In 2009, then Secretary of State Hillary Clinton was asked in Congress about abortion rights in other countries and whether the administration had any plans to further restrict abortions throughout the developing world.

I don’t know why they chose now to publicize these remarks from 2009, but I applaud them for doing so. Hillary Clinton can speak with passion and authority when she chooses to.

I only hope that she will choose to speak with such passion in proposing to prosecute the criminal bank executives that are still violating the law. It was one thing for Obama to have refused to prosecute them in some misplaced worry about the impact on the economy of prosecuting them. It is quite another for him to refuse to prosecute even while they continue to break the law after they promised not to do it anymore.