Can we have a civil, thoughtful discussion on this?

US consumers have more products and more discretionary income because of imports resulting in increased economic growth and a higher standard of living. Compartative advantage - Econ 101.

 

AFM, welcome back to the convo.

Few thoughts....

First, none of this negates any of the claims I've made.

So...

Yes, what you've written is true, but you really need to take the time to move past Econ 101. Econ 101 is the beginning of understanding economics, not the end. As a matter of fact, lessons taught in Econ 101 are often oversimplified in order to isolate the ideas and to help in the explanation, but sometimes (depending on what's being taught) have little relevance in the larger broader economy because, in practice, other more influential forces can substantially affect the outcomes.

If you understood double entry accounting, you'd know for every transaction there are (at least) two entries.

So let's look at the pic below...(sorry bout the size)

At the bottom, we see debits and credits...

Notice the first step is a debt of dollars?

Notice that the US private sector, in the NET is adding goods and services and losing dollars. Where do those dollars go? Into foreign accounts. Foreign nations hold over $12 trillion US dollars outside our economy between FOREX accounts and US Treasury holdings. These are dollars they captured selling us goods and services + the interest they've earned. In response, the US government goes into deficit in order to "restock" those missing dollars and the private sector magnifies those additions via borrowing (private credit).

Now to be clear, I'm aware that the US also exports goods and svcs, remember that the chart is showing the net balance of trade. In the net, we export dollars and imports stuff.

Production in a modern fiat economy starts with the capacity to consume. Then producers, who desire dollars create things of real value and then trade. The problem with trading with the foreign sector is, that unlike gold where running a neutral trade balance is almost a must, with fiat you can go deeply negative in dollars while foreign workers supply your nations with goods and services at lower prices and increase your standard of living. The problem comes when people fail to realize that the dollars sent out of your economy decrease the number of dollars in your economy and make consumption more difficult. There are even some who would call for a balanced national budget which would cause a loss of about $600-$900 billion dollar shortfall in the US economy.

**When you look at the chart below, remember this is only the US private sector and the foreign sector and it's net result.




As far as this claim:

I would agree to some extent that the US benefits from this situation as you say, but those benefits aren't infinite and they can only continue if the US government does not fear running infinite deficits in order to replace the money now in foreign hands.

 

Our national debt is not the result of foreign trade imbalances.

Transactions with companies in foreign lands are made with both parties benefiting. They have our dollars and we have they products. There is both a dollar deficit and a products surplus. So what ?? US consumers have more discretionary income when comparative advantage is allowed to work. And even if a foreign country has tariffs on our products the worst thing to do economically is to retaliate in kind.

The law of comparative advantage always works to the benefit of both parties involved. That is absolutely true. Populism and isolationism which are political arguments based on looking at the short term effects on small groups instead of the long term effects on the general population generate votes but result in economic harm. The best recent example of that is the Bush 43 steel tariff.

 

Of course, it plays a huge part, not the only part, but a huge one none the less.

One need only imagine the US private sector and the foreign sector trading with a fixed amount of money. Let's say that there are $20 trillion dollars in the US economy and the economy net imports $500 billion dollars a year, how long before the $20 trillion is all in the foreign sector? Well, if you let this run to its conclusion the foreign sector would have all $20 trillion in 40 years. It makes no difference how much value you get from the goods you've sent, nor does it matter how it affects your quality of life, the fact is $500 billion in trade deficit, is $500 billion dollars the economy is losing and unless the government creates the money to replace it, it will vanish. Period.

 

The economy loses nothing when the US has a trade deficit. The wealth to purchase the goods from other nations is created in the US.

 

People don't spend "wealth" they spend dollars.

 

Real 'global trade' has been stagnant for decades; Ford shipping itself stuff from Mexico or Red China isn't 'international trade' or 'trade with Mexico', it's just Ford moving its own materials from one dept. and division to another. Counting that as 'foreign trade' is just ridiculous.

 

It certainly sucks all that cash out of the domestic markets that right wingers turn around and snivel about the govt. printing more of.

 

People create wealth via human capital and are compensated with dollars. US consumers have been buying goods made in foreign countries for centuries and using dollars to pay for them. There is no inherent economic or monetary problem with that.

 

That's ridiculous. Econ 101.

 

Where do the dollars come from? You are ignoring the increasing concentration of wealth in fewer hands, and the change of the US from creditor to debtor nation relative to the rest of the world in the last 50 years.

Econ4Every1 said (#600):

So while productivity proceeds consumption, demand for that productivity comes before productivity. Creating stuff does not create demand, it supplies it. If you don't have an economy that ensures that the lower and middle classes have the money to demand/ consume productivity, the producers will have ever-smaller markets to sell to. The money needs to start at the bottom and work its way up to where producers can compete for it and use that money to create the goods and services people consume.

You said "production precedes consumption" , but Econ4Every1 has nailed the inadequacy in that bald statement, ie, production does not precede demand/desire/need, which always exists whether you have production (to supply this need) or not.

So I repeat, in a world of plenty, the public sector should supply the necessities as a matter of course, and the private sector the 'goodies', which ought to be the incentive for individuals to participate and create value. Automation will force this onto society eventually.

 

The dollars come from wealth creation.

Competition creates increases in productivity.

Unfunded demand creates noting. If a caveman desires food he goes out and collects berries. If a modern man desires a new car he goes out and sells insurance, fixes cars, drives a delivery truck, .. etc. and uses the wages to make the purchase. In both and all cases production precedes consumption. This is all very simple.

Economic growth is the best way to maximize the real median household income and the growth of the standard of living.

 

Wrong, all dollars originate with the US government consuming from the private sector. The government creates dollars and spends them into the economy.

The banking industry magnifies the dollars the government creative via credit creation. Bank dollars are created out of nothing.

On the banking side, dollar creation starts with a loan application. It is the acceptance of a creditworthy borrower that creates the justification for bank credit.

You don't need wealth to borrow money, all you need is income.

While I agree competition is a good thing, it does not necessarily increase productivity.

Unfunded demand. You mean people that want things but don't have money to consume them? LOL...You're making my argument. Couldn't agree more, which is why policies that promote wealth and income in the middle class will increase growth in the economy.

Wow, you're on a role...Again, making my argument. Desire proceeds collection (productivity).

If a modern man desires a new car he goes out and sells insurance, fixes cars, drives a delivery truck, .. etc. and uses the wages to make the purchase. In both and all cases production precedes consumption. This is all very simple.[/quote]

You have sooooo made my argument (again) but are stubbornly refuse to accept it.

The person in question in your example has a desire (a car), and then he goes out and is productive (sells). Do you think the car company would have built the car if there were no demand for them?

Now let's turn that around, do you think that the desire to own a car would exist even if there were none to buy?

As people in 3rd world countries who desire them, but the producers don't make them because of only desire+means=production.

And yet, after 35 years of the supply-side theory that you appear to worship, this generation will be the first that will not improve its standard of living. Now with "Trumpcare" we can expect if it passes the standard of living to fall even farther.

 

You have sooooo made my argument (again) but are stubbornly refuse to accept it.

The person in question in your example has a desire (a car), and then he goes out and is productive (sells). Do you think the car company would have built the car if there were no demand for them?

Now let's turn that around, do you think that the desire to own a car would exist even if there were none to buy?

As people in 3rd world countries who desire them, but the producers don't make them because of only desire+means=production.



And yet, after 35 years of the supply-side theory that you appear to worship, this generation will be the first that will not improve its standard of living. Now with "Trumpcare" we can expect if it passes the standard of living to fall even farther.[/QUOTE]

Wealth creates money as a medium.

Demand is funded by production. It's all very simple and does not take multiple paragraphs to explain.

This generation endured the fallout from the liberal caused housing bubble and gov regulation caused financial crisis. And the 8 years of Command/Control Obamanomics.

 

Demand does NOT have to precede production, and seldom does with the exception of production that has already been established. Most often businesses begin as a result of an idea which the investors hope will attract consumers, produce a demand which eventually results in a profit greater than their initial investment. Some businesses fail rapidly, while some continue to exist and even grow. Some failures even produce large profits for a short term. How many people remember 'pet rocks', the 'mood rings', 'the clapper', 'chia pets', 'hula hoops', or the 'frisbee'? Often new products are created, lacking any initial demand, and priced accordingly perhaps even below the total cost in hopes of creating a demand great enough that a profit could be made and then adjusting the price downward to maintain/grow the business profitably. If a product catches on, creating a consumer demand, competition often results with improvements or come form of change with hopes of attracting existing or new consumers as a result.

In a society which nothing greater than the most essential needs were produced, a barter system of trade would in most instances suffice. Trade with adjacent/distant societies can only exist as long as each society can continue to produce something with which it can trade, and in the past quite often wars erupted as a result of one society having exhausted the resources with which it conducted trade. While commodity money came into existence to make trade easier and result in the exchange of things based upon their relative value, trade could continue only as long as those trading had something of value to trade.

Along comes the Federal Reserve Banking System, initially creating paper money having no value of its own, but backed by the promise to allow it to be exchanged for a commodity having 'real' value, gold or silver coins equal to the face value of the paper note. Government did not initially create money and spend it, but banks provided the source by which commodity money could be safely stored, earning interest, while introducing paper currency into the market place. The growth of commodity money, produced as a result of private individuals mining gold and silver could not produce enough to cover the interest growth created by banks and banks could not survive massive withdrawals of the commodity money individuals had placed in them, so the backing was eliminated leaving us with only fiat money and the resulting inflation caused the interest rate growth of it and the necessity of printing more of it to assure depositors are able to make cash withdrawels without depleting the banks total cash on hand. Has anyone ever gone to the bank and requested a very large cash withdrawal? If so, have you not been met with the response "Would you not like to have that in a bank check rather than cash?"

The worldwide median Household income is about $10,000, while the U.S. median Household income is about $52,000.
Consider inflation of 3% to apply worldwide. That would raise the median HH incomes above to $10,300 and $53,560.
To offset that would result in a wage increase of $0.15 and $0.75 per hour respectively.

Inflation, in my opinion, is our biggest problem having great effect on everyone, with more negative effect on the poor and middle class and more positive effect on the wealthiest and governments. Governments use it as a tool to grow dependency, more social programs, more social spending, more safety nets, etc. Inflation is a hidden tax, and while some of the middle class, and property owners may feel their wealth is increasing as a result, for example a house I bought in the early 70's for $39,000 is currently appraised and taxed as worth nearly $300,000. Were I still living in it I could no longer afford the tax each year.
Inflation and increased tax rates for the rich does not, and never will, result in their becoming less wealthy, and probably a great many of them are quite happy with government raising their taxes to pay for social spending as it results in maintaining/growing their wealth even more.

Is collectivism/socialism/communism/liberalism/progressivism (pick one) the answer? Considering the median Household income shown above, I would say that the solution lies in making the worldwide median Household income somewhat more equal, which would produce a more equal field for businesses to compete with one another, but I don't expect governments of emerging nations to allow median Household incomes to achieve parity with those nations they presently have a competitive advantage over.

 

AFM wrote:

Demand is funded by production. It's all very simple and does not take multiple paragraphs to explain.


But apparently it's not simple, because you can't understand it.
I could fund my own demand/need for food by hunting/gathering (through my own productivity) without having money. But this is not practical in a modern economy, in which people must first have money to 'fund' their own demand/needs. This can only work if everyone first has a job enabling him to 'earn money', to consume and finally to trade. Some will be highly successful in this trade and be able to invent new products. but the rest still need an above-poverty-level job in order to obtain money to consume the necessities (and hopefully more).


........And the 8 years of Command/Control Obamanomics.

Can you explain why - at the beginning of those 8 years - people would have even considered that it was time to modify/intervene in supply-side, given its - according to you - bracing benefits that ought to be so obvious to everyone?












.

 

But the ability of society, in the aggregate, to pay for goods or services (with money) does precede production of goods and services in that society. Presently - in the first world at least - enough people have enough money for the system to function, although in an increasingly alienating manner (hence the rejection of establishment political parties around the world) .

Probably true for certain wealthy individuals, which is why the public sector much be constituted to print money in order to
to fund the job creation necessary to maintain full employment. (Public sector employment tends to be labour intensive eg policing, nursing and hospitals, and teaching in special needs and other schools, which are all woefully underfunded at present.

BTW, some thoughts on public sector money printing and capacity utilisation:

(from Chris Brown): "If someone tells you that the government can't afford something, like say...Paying benefits to SS recipients or fund healthcare or build a bullet train from NY to LA....Be sure and ask why.

If they say the US government can't afford it, remind them how silly that is. The government can create all the money it wants and it can use those dollars to purchase whatever it wants from the US private sector.

At that point, you'll probably be told (in a scolding voice) that when the government creates money that it results in inflation. To which, you'd point out that they said *money* was the limitation and now they've rightly identified the real limitation.

Now that we've identified the real constraint, make sure you both agree on the cause of inflation driven by demand. Simply put, inflation driven by demand happens when demand for goods and services exceeds the private sectors ability to supply them. Now in the case of a bullet train from Boston to LA, do you really believe that there isn't enough labor and raw materials in the nation to supply what's needed to build a train? Really? I mean we've funded billions, even trillions of dollars to fight 2 wars, but we don't have the resources to build a train without causing insurmountable shortages such that it will cause the value of the dollar to fall long term? What about healthcare? Does anyone really believe that the nation can't find people to step up into those jobs (if the training was freely available) without creating massive permanent labor shortages?

The reality is that we have 20 million people (source BLS) who are under/unemployed with a net 145k new workers entering the job force each month (Source WSJ). The labor is there. The private sectors productive capacity is at 75%, which is 5% lower than the 40-year average, 10% lower than the 40-year high and 17% lower than the 75-year high (1940's). (Source https://www.federalreserve.gov/releases/g17/current/)

The reality is that we fear inflation more than we fear unemployment and wasting potential productivity. (end quote)
(Another reason Brown hasn't mentioned is the establishment is doing just fine with the present system, thank you very much).

This is what Keynes recognised in 1944, but his concept of a 'Clearing Union' - which would have promoted mutually beneficial, sustainable trade between all nations, was crushed by nationalism and imperialism.

Keynes would have said that too.

 

And again you have shown that production must precede consumption. QED

Ideology. Socialists for some reason believe that it is superior to implement command/control economic policies despite the real world superior performance of supply side policies. It is unexplainable why a political party would prefer 1% growth to 3% growth.

 

Demonstrably false.

I suppose magnify is a fine enough characterization of the further creation of dollars in the FRB system.

How is this different from the government side? Just think of a T-Bill as a loan application...as that is all it really is.

How do wealth and income fundamentally differ in your opinion?

 

Why don't they sell snowmobiles in Lybia? Because there is no demand for them. Producing them there wouldn't change that. But, it sounds like your saying demand is irrelevant. That's the single most ridiculous statement you've made in your conversations with me.

You don't "produce demand", you "meet demand". Demand is the result of a consumer that has desires or problems they need solutions to. That doesn't mean that consumers define the solution, they simply have base needs and brilliance of the entrepreneur is to identify base needs and identify a solution and unite the elements required to bring a solution to market uniting elements of the solution, funding, and marketing.

Said another way, people didn't "demand" and iPhone before there were iPhones, but the desire to have all of the technologies converged into an iPhone are things that people desired long before the iPhone existed even if they didn't know exactly the form it might take. A handheld wireless phone. This meets the desire to stay in communication with greater flexibility. A camera in your phone, people like taking pictures. Highly portable computer and internet device, again this increasing the desire to stay in touch with the world in a greater number of places and have greater access to information..etc etc...Do you really beleive these desires didn't exist before the iPhone was created?

The demand is to be entertained, to increase happiness, perhaps just obtain something cute. These are all wants and desires that people create and produce to meet.

Again, you're stumbled into my point. Simply creating things isn't enough. You have to create things that people desire. That's not to say that you can't create the desire through marketing, but it is the desire that fuels the production.

Of course, it has value, it's just that you define value in a very limited way. Let's say I pulled out a key, an average key and asked you to pay me 100oz of gold for it or $1 million dollars, whatever, you would rightly laugh in my face. But if I told you that it was the only way that you could EVER escape the room that you were in, can you see how the value of the key might change?

It has no intrinsic value, but it can have extrinsic value. Dollars created by the US government have extrinsic value because the government requires that you obtain them and make payment in taxes. You can't choose not to pay taxes as an adult unless you wish to live in the wilderness isolated from the rest of society, or live as a beggar on the streets. If you wish to be a productive part of society you must pay your taxes. The US government has created penalties for failure to pay and it has the authority to carry out it's rules. The extrinsic value of the money government creates is proportional to your desire to avoid those penalties.

Of course, if the authority to enforce those penalties is removed or it is taken over, the value of the government's unit of account, the dollar will have no extrinsic value. But that's hardly a problem, don't save your excess income in dollars. Problem solved. However, is maintaining the value of your possessions really going to be your biggest problem in the event that government collapses?

I doubt it. Libertarians are planning for a problem that may never come, at least in their lifetimes, and even if it did, chances are they would lose most if not all of what they own anyway to the anarchy that would ensue or perhaps the power that moves in to take over where our government has failed.

Why, do you think you wouldn't get a raise for 40 years?

This problem is mostly faced by those on fixed incomes. I don't want to diminish the importance of this fact, there are solutions. If you've paid off your house (or a sizeable portion of it) you can utilize a reverse mortgage to pay your taxes. You can sell your home and move somewhere more affordable, or you can use your savings to supplement the increased cost. As a homeowner that bought in the 1970's you've both benifited from inflation and now that you are on a fixed income, you're being penalized by it. It's not like it's all downside with no upside. That house you paid $39k for at a time when your income was $6-$9k (average between 1970-1975) was worth ~$200,000 20 years later when your income had increased to approx $35k (just using averages). If you were smart, your house payment was still $280+tax meaning you had more disposable income than those who were buying a house like yours that same year. If you should choose to waste that income and not plan for your own future (knowing that someday you were going to be on a fixed income) then who's fault is that? Where is the personal responsibility?

The data says otherwise. In the 1960's when the top tax rate was 90% the average CEO made something like 6 times the average employee, now it's over 300 times that, where at the top effective tax rate is closer to 20-25% or 65% less than it was in the 1960's.

To be clear, I'm ok with lower tax rates on the wealthy if the incentives drive growth in the middle class. However, that's not what's happeneing today and that is, of course, the real issue.

I think taxes have a purpose, but I don't believe the federal government needs taxes to pay for things.

As far as inflation, well, that's a longer discussion. Start a thread on it and I'd be happy to join it.

I don't think that political ideologies have the answers to economic issues. I think political ideologies are the glasses that distort economic reality in firmly held prejudice (as defined as a preconceived notion). I think understanding and employing a coherent economic strategy, regardless of ideology is the answer. I believe that ideologies should wrap themselves around sound economics, not have an ideology that tries to wrap an economic policy around its preconceived ideas, either on the left or on the right. If it's not obvious, I don't support the economic policies of any of the mainstream political parties. They all have it wrong, though some more than others.

For example, should the government pay for education? There are extremely good economic reasons to embrace that idea. Then ideology comes along and introduces ideas like "socialisim" or the idea that in order to pay for education the government must "steal" from others. Those are political positions that lack understanding of economics. I think Conservitisim could imbrace the idea of free college for everyone if Conservitives only understood how the economy we have, right now, really works.

I'll withhold comment here because I suspect it would simply be taken as an insult and just agree to disagree.[/QUOTE]

 

Then demonstrate it.

Part of the problem with claims like the one I've made is a limited glossary of terms, but state your demonstration of why you believe it's false and I'll defend my position.

The T-Bill exists outside the private sector. Honestly, the entire system of Treasuries is an anachronism held over from the gold standard. If we were to reach a point where foreign governments didn't wish to purchase our treasuries such that we could continue to roll-over our commitments, there is absolutely nothing that would prevent the federal government from selling Treasuries directly to the Fed.

To answer your question more directly, when the government repays a treasury, who profits? The holder of the Treasury, right? Take a look at who holds Treasuries and you realize that payments on Treasuries and more specifically the interest, is just another way that the government adds income to the non-government.

Wealth is the accumulation of income.

In other words. I might live in a fully furnished apartment overlooking Central Park, I could rent all of my possessions, my car, my furniture, everything. I could make $500k, but if I spent it all without saving any, I wouldn't have wealth, only income.

 

You actually demonstrated it was false later in your post when you correctly pointed out that Banks indeed create dollars. Whether or not those dollars are simply entries on a computer is irrelevant.

Correct - The Fed is the lender of last resort.

That is absolutely irrelevant to my point.

Thanks for the clarification.

 

Yes, I don't always make the distinction between private credit and government money.

Now, you may be wondering why I call government created currency "money" and bank create money "credit". Because in the government's case, the government can create all the dollars it want's and hold it's liabilities infinitely, those in the private sector cannot.

To say the government has or does not have money is a meaningless distinction focused on fiscal aspects of the economy. The government having or not having money ended when the government swapped to a fiat currency. The government can never run out of dollars and can therefore never become bankrupt or unable to pay interest on its debt.

In other words, the US government isn't fiscally constrained its constrained in the creation of its dollars. Its only constraint is inflation.

Now, getting back to the claim that I made I said that; " all dollars originate with the US government consuming from the private sector. The government creates dollars and spends them into the economy."

Let's debate this claim, shall we?

In the system we have now:

1) Banks or the Fed, cannot create reserves on their own.

2) Banks must hold reserves in order to make loans.

3) Reserves originate from the government.

4) Without government money, banks cannot create credit

Therefore, all money originates with the government that provides reserves and collateral for the Fed to create credit.

The Fed is a semi-autonomous system of the US government.

Let's take this slowly. This is the beginning of my argument, not the end. Baby steps.

 

It is still credit as it requires debt to exist. It's all just credit.

No argument from me. I would go further to say that its only constraint is the people itself and how much they are willing to allow a devaluation of their currency.

Love to.

It's true that they need a debtor in order to create reserves.

Yep

Not always

False.

False.

The Fed is a bank. That has a somewhat loose reporting structure to the US government.

Don't be patronizing. I have forgotten more about our banking system than I care to point out.