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Reality in economics.

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  • Strongly Liberal Democrat
    Democrat
    Pensacola, FL
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    Instead of antiseptically excised discussions of monetary policy what about a real discussion of the outcome of the wide and widening income gap. So far Hillary is treating it as a normal innocuous development. I see it as portending more violence.
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    Chet Ruminski Wrote: Instead of antiseptically excised discussions of monetary policy what about a real discussion of the outcome of the wide and widening income gap. So far Hillary is treating it as a normal innocuous development. I see it as portending more violence.

    While I agree that the income gap is a huge problem, understanding how money works is the first step in solving the problem.

    For example, what does it mean when the government "borrows"? Most people see borrowing as an operation where one entity loans something that exists to another entity...Mathematically most people think of borrowing like this:

    Lender starts with 1 and lends it to borrower and ends up with zero.

    1 - 1=0

    Borrower starts with none and borrows 1 from lender and ends up with one.

    0+1=1

    The sum of this transaction will ALWAYS be 1, it can never be zero

    Repayment is just the opposite and will still end in 1.

    But what does it mean when the government "borrows"?

    Who is -1?

    In the economy today it would appear that someone in the private sector must go -1 for the government to be +1, but this is FALSE and believing that someone in the private sector must be -1 in order for the government to be +1 is the fundamental misunderstanding of macro economics and until this is understood, we cannot close the income gap.

    The government creates money from nothing. It's not "borrowing" from someone else. One need only think of government on day 1, before a single dollar has been created, who would the government borrow from?

    ITSELF!

    Now it doesn't have to borrow from itself, it could simply choose to create without any accountability. However accountability is important and when the government borrows it is accountable.

    So it would look like this:

    Borrowing: 0+1=1 where the government starts with zero and creates 1

    However, when the government "borrows" is creates a record of that borrowing in the form of a liability that is exactly equal to it's borrowing.

    0+(-1)=-1

    Now the government has 1 and -1 and it's sum is zero. When it spends it's 1, the private sector is +1 and the government is -1.

    To repay the government would have to take the 1 from the private sector.

    Private sector -1 government +1

    So now the government has 1 and -1

    1+(-1)=0

    Remember at the top the sum was 1? When the government repays it's debt the sum is always zero.

    Trying to address "income gaps" or Hillary's fiscal and monetary policy is a waste of time as long as the vast majority don't understand what I just wrote.

    Sorry if this is kinda derailing your thread, but you seemed a little miffed we were discussing things that seem a little more abstract rather than dealing with real human issues, but I think understanding the abstract nature of our money system is the only way to affect real change that can defend itself from those that profit from the system we have today.

  • Liberal Democrat
    Democrat
    Colorado Springs, CO
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    Uncommon cents -- Good analysis. Americans seem to be obsessed with federal government debt, and it clouds their thinking on monetary policy. We had a similar discussion on this website back in 2010. This is copied from my post, the Stimulus Story, at the time.

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    I received the Stimulus Story below in one of those circulating e-mails so I can't credit the author. Maybe others have seen it as well. The story is about money, but another "stimulus" might be how it stimulates your thought process...your critical thinking skills. I could share my thoughts but will hold off for now and let others chime in. Any takers?

    Stimulus Story

    It is the month of August, on the shores of the Black Sea. It is raining, and the little town looks totally deserted. It is tough times, everybody is in debt, and everybody lives on credit.

    Suddenly, a rich tourist comes to town. He enters the only hotel, lays a 100 Euro note on the reception counter, and goes to inspect the rooms upstairs in order to pick one.

    The hotel proprietor takes the 100 Euro note and runs to pay his debt to the butcher.

    The butcher takes the 100 Euro note, and runs to pay his debt to the pig grower.

    The pig grower takes the 100 Euro note, and runs to pay his debt to the supplier of feed and fuel.

    The supplier of feed and fuel takes the 100 Euro note and runs to pay his debt to the town's prostitute that in these hard times, gave her "services" on credit.

    The hooker runs to the hotel, and pays off her debt with the 100 Euro note to the hotel proprietor to pay for the rooms that she rented when she brought her clients there.

    The hotel proprietor then lays the 100 Euro note back on the counter so that the rich tourist will not suspect anything. At that moment, the rich tourist comes down after inspecting the rooms, and takes his 100 Euro note, after saying that he did not like any of the rooms, and leaves town.

    No one earned anything. However, the whole town is now without debt, and looks to the future with a lot of optimism.

  • Are you sure you want to delete this post?
        
    Schmidt Wrote:

    Uncommon cents -- Good analysis. Americans seem to be obsessed with federal government debt, and it clouds their thinking on monetary policy. We had a similar discussion on this website back in 2010. This is copied from my post, the Stimulus Story, at the time.

    ----------------------------------------------------------------------

    I received the Stimulus Story below in one of those circulating e-mails so I can't credit the author. Maybe others have seen it as well. The story is about money, but another "stimulus" might be how it stimulates your thought process...your critical thinking skills. I could share my thoughts but will hold off for now and let others chime in. Any takers?

    Stimulus Story

    It is the month of August, on the shores of the Black Sea. It is raining, and the little town looks totally deserted. It is tough times, everybody is in debt, and everybody lives on credit.

    Suddenly, a rich tourist comes to town. He enters the only hotel, lays a 100 Euro note on the reception counter, and goes to inspect the rooms upstairs in order to pick one.

    The hotel proprietor takes the 100 Euro note and runs to pay his debt to the butcher.

    The butcher takes the 100 Euro note, and runs to pay his debt to the pig grower.

    The pig grower takes the 100 Euro note, and runs to pay his debt to the supplier of feed and fuel.

    The supplier of feed and fuel takes the 100 Euro note and runs to pay his debt to the town's prostitute that in these hard times, gave her "services" on credit.

    The hooker runs to the hotel, and pays off her debt with the 100 Euro note to the hotel proprietor to pay for the rooms that she rented when she brought her clients there.

    The hotel proprietor then lays the 100 Euro note back on the counter so that the rich tourist will not suspect anything. At that moment, the rich tourist comes down after inspecting the rooms, and takes his 100 Euro note, after saying that he did not like any of the rooms, and leaves town.

    No one earned anything. However, the whole town is now without debt, and looks to the future with a lot of optimism.


    Haha, that's extremely clever. I love it. Thanks for sharing. I'll give that some thought.
  • Strongly Liberal Democrat
    Democrat
    Pensacola, FL
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    The income gap is self explanatory. It is the result of earning money without using labor. It is the application of Cheaper, Faster, Easier. Specifically it is the result of inevitable cyclical market corrections and purely speculative trading that benefits traders that benefit from both trading fees and position fees amplified by dual positions on trades. The reality there is no influence toward continuity in the market. No matter what theory there is only one consistent influencing force. Profit. There is no social influence in finances. On the contrary the government influence in finances has been to reverse any social benefit. (Government=laws&enforcing laws)
  • Strongly Liberal Democrat
    Democrat
    Pensacola, FL
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    "No one earned anything. However, the whole town is now without debt, and looks to the future with a lot of optimism."

    Sorry Schmidt, at the most cute, at the worst believed. The undeniable obvious is the money was stolen from the tourist.

  • Center Left
    Independent
    Central, FL
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    Schmidt, I thought it was very good.

    Just a suggestion for the many very smart professors of economics:

    plus.google.com/communities/10703447320...

  • Liberal Democrat
    Democrat
    Colorado Springs, CO
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    The Stimulus Story is nothing more than an illustration of temporary credit or a "loan" and the velocity of money in paying off personal debts in society. You could have taken out all the actors except two and the tourist, and the result would have been the same.

    In realty, banks interject money into the system with loans, and that money circulates in society, being spent again and again, thereby having a stimulative effect on the economy.

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    Schmidt Wrote:

    The Stimulus Story is nothing more than an illustration of temporary credit or a "loan" and the velocity of money in paying off personal debts in society. You could have taken out all the actors except two and the tourist, and the result would have been the same.

    In realty, banks interject money into the system with loans, and that money circulates in society, being spent again and again, thereby having a stimulative effect on the economy.


    I think what the story tells us is that, because everyone was in debt. No one was in debt. They could have just as easily solved the problem by agreeing to forgive each others debts.
  • Strongly Liberal Democrat
    Democrat
    Pensacola, FL
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    As they say, intuitively obvious to the most casual ovservation. Besides the inn keeper being a theif I wonder why uncommon didn't directly reference that double entry accounting shows zero balance across the board.

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    Chet Ruminski Wrote:

    As they say, intuitively obvious to the most casual ovservation. Besides the inn keeper being a theif I wonder why uncommon didn't directly reference that double entry accounting shows zero balance across the board.

    I would point you to the post above where, essentially, I've done just that :)
  • Liberal Democrat
    Democrat
    Colorado Springs, CO
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    Uncommon cents -- Good point on forgiving debt. So here's a thought. Given that Social Security has largely reached the point of PAYGO...pay as you go with some annual drawdown of the Trust Fund, wouldn't it make sense to just do away with the Trust Fund entirely (forgive all indebtedness by the Federal Government), do away with the payroll tax, and in return pay Social Security benefits out of the general fund. Income taxes could be raised to offset the loss of revenue from the payroll taxes.

    If legislation could be passed that SS benefits must be paid yearly forever out of the general fund and indexed to inflation, we would have a more equitable tax distribution. The payroll tax as it stands is regressive.

    And we would wipe off $2.8 trillion from our national debt, a debt we owe ourselves anyway.

    Just a thought, unlikely to ever be taken up by Congress.

  • Strongly Liberal Democrat
    Democrat
    Pensacola, FL
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    Uncommon Cents Wrote:
    Chet Ruminski Wrote:

    As they say, intuitively obvious to the most casual ovservation. Besides the inn keeper being a theif I wonder why uncommon didn't directly reference that double entry accounting shows zero balance across the board.

    I would point you to the post above where, essentially, I've done just that :)
    Keeping in line with the gravitas of the subject "I would point you to the post above where, essentially, I used the word directly." Additionally I am assessing Schmidt a penalty of -2 points and an award for the most unredeeming on any level for the Inn Keeper lesson. He has an entire exemplary history of (insert adverb form of Oracl) posting at risk from the Inn Keeper.
  • Liberal Democrat
    Democrat
    Colorado Springs, CO
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    Chet Ruminski Wrote:
    Additionally I am assessing Schmidt a penalty of -2 points and an award for the most unredeeming on any level for the Inn Keeper lesson. He has an entire exemplary history of (insert adverb form of Oracl) posting at risk from the Inn Keeper.

    Chet -- While I am quite adept at microeconomics having been involved in risk management of potential and existing projects for my former company, I still consider myself a student of macroeconomics. I have really appreciated what Carlitos has done on this website for years educating us on the basics of Modern Monetary Theory. I still often fall into conventional economic thinking, but one has to basically keep both in mind when it comes to politics because so many of our politicians and perhaps over 99 percent of the general public has not grasped how fiat currencies work. Even Bernie Sanders, a student of MMT himself, has to often talk the other economic language when it comes to politics.

    So when Uncommon Cents comes on this website and starts sharing his MMT views, I don't mind again throwing thoughts out there to be shot down by him or Carlitos. They will straighten out my thinking with clarity, and I respect them for that. However, when you jump on me and ridicule my thinking, I would likewise respect it if I understood it. Much of the time I can't understand what point you are making. I try but I can't.

    So let me push back on you. I put the Stimulus story out for critical thinking. I think there are several ways to look at it with respect to macroeconomic theory. The number one lesson in my mind is how spending affects the economy...how one act of spending can multiply and have a stimulative effect on the economy, and in this case also wipe out debt. I have shared this story with friends many times, and you are the first person to claim moral righteousness and indignation about the inn keeper temporarily borrowing the tourist's money without his knowledge. You missed the whole point of the exercise in critical thinking, but your response does reveal how your mind works...how your brain is wired differently from mine.

    When it comes to debt on a federal macroeconomic scale, I often have to go back and reread some of the stuff that Carlitos has shared with us. However, I also realize that for both Bernie Sanders and me, it is difficult to argue economic politics without living in the world of the masses and their simplistic household budget view of everything. I will therefore close with a link to Bill Mitchell's take on Debt, Deficits, and Modern Monetary Theory. It is worth reading to stimulate your thinking.

  • Strongly Liberal Democrat
    Democrat
    Pensacola, FL
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    Sorry you took offense because I appreciate your insight and I wasn't belittling your point. I was just poking fun because the stimulus story depends on denying paying the tourist interest on using his money or else denying that the Inn Keeper misappropriated the money. The story has potential value for fiat currency and monetary theory if in fact the Inn Keeper had created a fiat currency backed by the value of a stay in his inn considering everybody in town would value a stay at the inn in the amount he owed the butcher (need to check facts) . He could have given that money as payment to the butcher and then the process would have worked in reverse payment of debt because everybody considered a stay at the Inn as a finite value. Stipulated in the beginning because everybody in town accepted the Inn representing a value. Maybe not quite as entertaining in a Shakespearian way of developing interest, climax and resolution by manipulating the tourist but realistic in a monetary fashion.