1083: "Writing Styles"

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J Thomas
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Re: 1083: "Writing Styles"

Postby J Thomas » Sun Jul 29, 2012 3:21 am UTC

Max™ wrote:The money supply and debt are related, but in no way the same thing.

The debt is more accurately what stabilizes the value of money against variations in the money supply.


Do you have a model for how it works that the US national debt fluctuates rapidly to stabilize the value of money?
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Re: 1083: "Writing Styles"

Postby Max™ » Sun Jul 29, 2012 6:23 am UTC

What?

The National Debt is the basis for Treasury Bonds which have a broad stabilizing effect on the value of money.
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Re: 1083: "Writing Styles"

Postby J Thomas » Sun Jul 29, 2012 9:20 am UTC

Max™ wrote:What?

The National Debt is the basis for Treasury Bonds which have a broad stabilizing effect on the value of money.


Do you have some sort of basis for this assertion? Why would treasury bonds stabilize the value of money? Is is something the Fed does?
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Re: 1083: "Writing Styles"

Postby Max™ » Sun Jul 29, 2012 10:31 am UTC

A treasury bond is a stable long term investment, it won't produce dramatic returns, but you can be confident it will appreciate and not lose value.

Most of all, bonds essentially set the bottom interest rate for other investments, there is no reason to do something else if you can just grab a treasury bill/note/bond and get the same or more return, as they are about as secure as an investment gets due to being backed by the US government.


Additionally they add what I suppose you could call financial inertia, the sheer mass of treasuries involved and the influence it has on things like mortgage rates is an important bit of information for stock investors and money managers.

Without something to function as a secure investment and thus provide a minimum risk/return floor, what would you expect the situation to be like? Larger fluctuations, larger losses, more uncertainty at all times, less incentive to engage in long term investments due to the inability to guarantee some sort of stability.


Additionally without an indicator like people buying or selling treasuries at varying rates, how would you even identify potential downturns or upturns with any confidence, much less have any likelihood of predicting them over any period of time?


No, if you are only thinking of debt in terms of useless household debt analogies, perhaps this might not seems sensible, but without the debt we wouldn't need to issue treasury bonds to finance it, without treasure bonds we wouldn't have any sort of safe minimum return on investment against which to compare other investments, which has a devastating effect on things like the stock markets, which are of course somewhat important for things like businesses and so forth.
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Re: 1083: "Writing Styles"

Postby J Thomas » Sun Jul 29, 2012 1:28 pm UTC

Max™ wrote:A treasury bond is a stable long term investment, it won't produce dramatic returns, but you can be confident it will appreciate and not lose value.

Most of all, bonds essentially set the bottom interest rate for other investments, there is no reason to do something else if you can just grab a treasury bill/note/bond and get the same or more return, as they are about as secure as an investment gets due to being backed by the US government.


Additionally they add what I suppose you could call financial inertia, the sheer mass of treasuries involved and the influence it has on things like mortgage rates is an important bit of information for stock investors and money managers.

Without something to function as a secure investment and thus provide a minimum risk/return floor, what would you expect the situation to be like? Larger fluctuations, larger losses, more uncertainty at all times, less incentive to engage in long term investments due to the inability to guarantee some sort of stability.


Additionally without an indicator like people buying or selling treasuries at varying rates, how would you even identify potential downturns or upturns with any confidence, much less have any likelihood of predicting them over any period of time?


No, if you are only thinking of debt in terms of useless household debt analogies, perhaps this might not seems sensible, but without the debt we wouldn't need to issue treasury bonds to finance it, without treasure bonds we wouldn't have any sort of safe minimum return on investment against which to compare other investments, which has a devastating effect on things like the stock markets, which are of course somewhat important for things like businesses and so forth.


I can't figure out where to start with this mishmash. It makes no sense. I mean, each individual sentence can make a kind of sense, but when you put them together they don't make any sense whatsoever.

Why should the government put an artificial floor on investment returns? Would you want the government to put an artificial floor on sugar prices, make sure the price of sugar never goes under $2/pound? Should they put a floor on copper prices? Should they put a floor on business profits? If people try to invest too much then it's only reasonable for the return on investment to go down. That's how we know we're overinvesting.

You have a whole collection of ad hoc arguments that sound sort of plausible, but do not add up. Government bond prices might be some sort of indicator of something or other, but what dollar value should we put on that indicator? We owe interest on the whole debt, how much of that interest does the indicator pay for? If we didn't have it, what other cheaper indicators would we develop, that might in fact indicate better what we want?

I believe if you were willing to do computer modeling, and learn about how feedback loops work, you might not fall into these verbal traps so easily.

Whyever would you argue that an essentially-unlimited source of safe bonds is *good* for the stock market?
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Re: 1083: "Writing Styles"

Postby Max™ » Sun Jul 29, 2012 1:38 pm UTC

J Thomas wrote:
Max™ wrote:A treasury bond is a stable long term investment, it won't produce dramatic returns, but you can be confident it will appreciate and not lose value.

Most of all, bonds essentially set the bottom interest rate for other investments, there is no reason to do something else if you can just grab a treasury bill/note/bond and get the same or more return, as they are about as secure as an investment gets due to being backed by the US government.


Additionally they add what I suppose you could call financial inertia, the sheer mass of treasuries involved and the influence it has on things like mortgage rates is an important bit of information for stock investors and money managers.

Without something to function as a secure investment and thus provide a minimum risk/return floor, what would you expect the situation to be like? Larger fluctuations, larger losses, more uncertainty at all times, less incentive to engage in long term investments due to the inability to guarantee some sort of stability.


Additionally without an indicator like people buying or selling treasuries at varying rates, how would you even identify potential downturns or upturns with any confidence, much less have any likelihood of predicting them over any period of time?


No, if you are only thinking of debt in terms of useless household debt analogies, perhaps this might not seems sensible, but without the debt we wouldn't need to issue treasury bonds to finance it, without treasure bonds we wouldn't have any sort of safe minimum return on investment against which to compare other investments, which has a devastating effect on things like the stock markets, which are of course somewhat important for things like businesses and so forth.


I can't figure out where to start with this mishmash. It makes no sense. I mean, each individual sentence can make a kind of sense, but when you put them together they don't make any sense whatsoever.

Why should the government put an artificial floor on investment returns? Would you want the government to put an artificial floor on sugar prices, make sure the price of sugar never goes under $2/pound? Should they put a floor on copper prices? Should they put a floor on business profits? If people try to invest too much then it's only reasonable for the return on investment to go down. That's how we know we're overinvesting.

It isn't an artificial floor, it's not a hard floor, but any investment which gives less return over time than a treasury bond can safely be called a bad investment.

You have a whole collection of ad hoc arguments that sound sort of plausible, but do not add up. Government bond prices might be some sort of indicator of something or other, but what dollar value should we put on that indicator? We owe interest on the whole debt, how much of that interest does the indicator pay for? If we didn't have it, what other cheaper indicators would we develop, that might in fact indicate better what we want?

I believe if you were willing to do computer modeling, and learn about how feedback loops work, you might not fall into these verbal traps so easily.

I am more than familiar with the mathematics behind feedback loops, but I must note that computer modeling an economic system involves excessive simplifying assumptions.

I wasn't saying that it was deliberately an indicator or an ideal one, I said that it is a very predictable investment.

Whyever would you argue that an essentially-unlimited source of safe bonds is *good* for the stock market?

It isn't essentially unlimited, and like I said, it finances numerous aspects of government, while providing a stable investment platform, one which is useful in a fairly unique manner, in that it is all but guaranteed to be a safe investment, enabling one to judge the gains from more risky investments in comparison to the expected yield from the same investment in bonds.
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Re: 1083: "Writing Styles"

Postby J Thomas » Sun Jul 29, 2012 6:42 pm UTC

Max™ wrote:
J Thomas wrote:Why should the government put an artificial floor on investment returns? Would you want the government to put an artificial floor on sugar prices, make sure the price of sugar never goes under $2/pound? Should they put a floor on copper prices? Should they put a floor on business profits? If people try to invest too much then it's only reasonable for the return on investment to go down. That's how we know we're overinvesting.

It isn't an artificial floor, it's not a hard floor, but any investment which gives less return over time than a treasury bond can safely be called a bad investment.


And the yield on treasury bonds is partly set by the Fed. and meanwhile the Fed manipulates the amount of private borrowing to influence the inflation rate. So the various parameters you are talking about are fundamentally arbitrary.

You have a whole collection of ad hoc arguments that sound sort of plausible, but do not add up. Government bond prices might be some sort of indicator of something or other, but what dollar value should we put on that indicator? We owe interest on the whole debt, how much of that interest does the indicator pay for? If we didn't have it, what other cheaper indicators would we develop, that might in fact indicate better what we want?

I believe if you were willing to do computer modeling, and learn about how feedback loops work, you might not fall into these verbal traps so easily.

I am more than familiar with the mathematics behind feedback loops, but I must note that computer modeling an economic system involves excessive simplifying assumptions.


Sure, and handwaving arguments in english are less simplified? One of the values for the models is that they let you say things more clearly. And they help you think more clearly. Balance that against the possibility that you will decide the map is the territory and you know the truth because the model said so, and it's a win. Because people are just as likely to believe they know the truth when they have worked out some sort of vague argument in english without even seeing the contradictions.

I wasn't saying that it was deliberately an indicator or an ideal one, I said that it is a very predictable investment.


Maybe part of our miscommunication is that you are using a financial definition for investment, where I think an economic definition is more appropriate.

A financial definition will say that you are investing when you give money with a solid expectation you will get more money back. A solid expectation usually involves promises by people whose word is known to be good and who will probably have the money so they can keep their word. In that sense the US government is maybe the best investment in the world.

By an economic definition, though, you invest when you buy stuff that will be used for future production rather than consumed. The intention is that there will be more and better stuff to buy because of the money you spent. It isn't an investment when Wimpy tells you "I will gladly pay you Tuesday for a hamburger today.". It isn't an investment when Wimpy tells you "I will gladly pay you extra Tuesday for a hamburger today.". It might be an investment if Wimpy tells you "Buy me a hamburger bun and a sack today, and I will catch pigeons in the park and sell them and pay you back more than your money by Tuesday.". You have to analyze how likely he will succeed.

In an economic sense, what do Treasury bonds pay for?
Medicare/Medicaid 24%. This may be worth doing, but it is not an investment.
Social Security 20%. Ditto.
Defense 19%. Ditto.
Non-defense discretionary 19%. Maybe.
Other. 12%. Maybe.
Interest. 6%. No.

This sort of thing is hard to split up accurately. Like, the interest is more like 18%, but much of it goes to pay interest on bonds bought with the Social Security money. That doesn't get counted as interest because the government is paying the interest to itself. It doesn't really count when the government just pays the money to itself, right? Except that when the SS crunch comes the government has promised it will pay off a lot of those bonds to give to SS recipients, and the money is already spent. Why doesn't that count as debt and interest on the debt?

And various government initiatives have paid off very well. Lots of military spending has been entirely wasted, but then there's the internet, and maybe nuclear power, and a variety of civilian technology was first developed for the military and then allowed to be useful when the military didn't want it. Hard to tell how much of it wouldn't have happened anyway. But it's hard for me to figure that more than say 30% of government debt was investment. And now the money is spent and we're still paying interest on it, except that no, we aren't paying the interest, we're borrowing the interest along with the other new non-investments we pay for.

Meanwhile, if you have some brilliant idea to create new products, you will pay more interest than you otherwise would because the absolutely safe federal debt provides an artificially good alternative. Except it isn't that simple. We have created a system that's so complicated it's almost impossible to understand. I consider that a fundamental design flaw, right there. When smart people like you make utterly bogus arguments because the system is incomprehensible, how likely is it that the system is working well?

Whyever would you argue that an essentially-unlimited source of safe bonds is *good* for the stock market?

It isn't essentially unlimited, and like I said, it finances numerous aspects of government, while providing a stable investment platform, one which is useful in a fairly unique manner, in that it is all but guaranteed to be a safe investment, enabling one to judge the gains from more risky investments in comparison to the expected yield from the same investment in bonds.


So what money value would you place on those services? And who benefits from them?

A whole lot of T-bonds are bought by banks. A long time ago banks were required to hold cash reserves to cover possible withdrawals -- as much as 20% or 25% of the money they owed. But with the Fed etc there is no danger of bank runs, and individuals are not allowed to withdraw large sums of money since they might use the money for drug deals or terrorism, so banks have less than 1% reserves. The law is still sort of there, but Federal Reserve members must instead have 10% reserves on deposit with the Fed, and they are allowed to hold the rest as interest-bearing T-bonds. Also, some rich people would pay more taxes on actual investments which would also be more risky. So they do better to keep part of their wealth in the form of T-bonds. On both cases, the ones who buy T-bonds do so because the laws are set up so they do better that way. If we passed a law that you had to buy T-bonds with 5% of your income each year as part of your retirement plan, then you would get the special benefits of T-bonds too.

I say that this debt provides an advantage to financial investors, at the expense of economic investors. If you want to lend money, you have a floor under your price that's set by the Fed. If you want to borrow money for actual investments, to make things and sell them, there's a floor under the price you must pay. Of course financial investors like to have a guaranteed profit. But the result is to make it harder for people who actually want to produce things, to get the capital together to do that.

Why do you want to help people who want a sure profit over people who want to actually improve the economy?
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Re: 1083: "Writing Styles"

Postby Max™ » Sun Jul 29, 2012 11:50 pm UTC

J Thomas wrote:And the yield on treasury bonds is partly set by the Fed. and meanwhile the Fed manipulates the amount of private borrowing to influence the inflation rate. So the various parameters you are talking about are fundamentally arbitrary.

Yes, I know, I am not arguing that point. I am saying that the existence of treasuries allows one to usefully gauge the relative risk vs return of another investment. If the risk is greater but the return is the same or less than a treasury bond, it is a bad investment.

Sure, and handwaving arguments in english are less simplified? One of the values for the models is that they let you say things more clearly. And they help you think more clearly. Balance that against the possibility that you will decide the map is the territory and you know the truth because the model said so, and it's a win. Because people are just as likely to believe they know the truth when they have worked out some sort of vague argument in english without even seeing the contradictions.

I again must note that if I am not speaking of a mathematically defined statement or a basic observable property, I am very rarely speaking of something which I think is absolutely true.

At most I only go up to "useful to consider as though it were true in a particular situation", I don't like beliefs, my brain screams at me when I deal with them.

The properties of treasury yield curves and their influence on things like mortgage interest rates or the stock market are not particularly controversial, there are numerous models already in existence relating to them, I'm not particularly interested in reinventing this wheel.

Maybe part of our miscommunication is that you are using a financial definition for investment, where I think an economic definition is more appropriate.

A financial definition will say that you are investing when you give money with a solid expectation you will get more money back. A solid expectation usually involves promises by people whose word is known to be good and who will probably have the money so they can keep their word. In that sense the US government is maybe the best investment in the world.

Well, I would say "when you give money with an intent to get more money back", not all investments are sound, but you are right that a well informed investment will have a solid expectation of positive returns.

By an economic definition, though, you invest when you buy stuff that will be used for future production rather than consumed. The intention is that there will be more and better stuff to buy because of the money you spent. It isn't an investment when Wimpy tells you "I will gladly pay you Tuesday for a hamburger today.". It isn't an investment when Wimpy tells you "I will gladly pay you extra Tuesday for a hamburger today.". It might be an investment if Wimpy tells you "Buy me a hamburger bun and a sack today, and I will catch pigeons in the park and sell them and pay you back more than your money by Tuesday.". You have to analyze how likely he will succeed.

In an economic sense, what do Treasury bonds pay for?
Medicare/Medicaid 24%. This may be worth doing, but it is not an investment.
Social Security 20%. Ditto.
Defense 19%. Ditto.
Non-defense discretionary 19%. Maybe.
Other. 12%. Maybe.
Interest. 6%. No.

This sort of thing is hard to split up accurately. Like, the interest is more like 18%, but much of it goes to pay interest on bonds bought with the Social Security money. That doesn't get counted as interest because the government is paying the interest to itself. It doesn't really count when the government just pays the money to itself, right? Except that when the SS crunch comes the government has promised it will pay off a lot of those bonds to give to SS recipients, and the money is already spent. Why doesn't that count as debt and interest on the debt?

And various government initiatives have paid off very well. Lots of military spending has been entirely wasted, but then there's the internet, and maybe nuclear power, and a variety of civilian technology was first developed for the military and then allowed to be useful when the military didn't want it. Hard to tell how much of it wouldn't have happened anyway. But it's hard for me to figure that more than say 30% of government debt was investment. And now the money is spent and we're still paying interest on it, except that no, we aren't paying the interest, we're borrowing the interest along with the other new non-investments we pay for.

Meanwhile, if you have some brilliant idea to create new products, you will pay more interest than you otherwise would because the absolutely safe federal debt provides an artificially good alternative. Except it isn't that simple. We have created a system that's so complicated it's almost impossible to understand. I consider that a fundamental design flaw, right there. When smart people like you make utterly bogus arguments because the system is incomprehensible, how likely is it that the system is working well?

I'm not making a bogus argument about treasuries being safe investments.

I'm not making a bogus argument about treasuries existing because of the debt financing situation we are in.

You may disagree that treasuries existing is a positive thing, but if there are benefits from treasury bonds being a part of the economy, then those benefits can be connected to the existence of the debt.

So what money value would you place on those services? And who benefits from them?

A whole lot of T-bonds are bought by banks. A long time ago banks were required to hold cash reserves to cover possible withdrawals -- as much as 20% or 25% of the money they owed. But with the Fed etc there is no danger of bank runs, and individuals are not allowed to withdraw large sums of money since they might use the money for drug deals or terrorism, so banks have less than 1% reserves. The law is still sort of there, but Federal Reserve members must instead have 10% reserves on deposit with the Fed, and they are allowed to hold the rest as interest-bearing T-bonds. Also, some rich people would pay more taxes on actual investments which would also be more risky. So they do better to keep part of their wealth in the form of T-bonds. On both cases, the ones who buy T-bonds do so because the laws are set up so they do better that way. If we passed a law that you had to buy T-bonds with 5% of your income each year as part of your retirement plan, then you would get the special benefits of T-bonds too.

I say that this debt provides an advantage to financial investors, at the expense of economic investors. If you want to lend money, you have a floor under your price that's set by the Fed. If you want to borrow money for actual investments, to make things and sell them, there's a floor under the price you must pay. Of course financial investors like to have a guaranteed profit. But the result is to make it harder for people who actually want to produce things, to get the capital together to do that.

Why do you want to help people who want a sure profit over people who want to actually improve the economy?

You're misrepresenting my argument here.

Would it be beneficial for someone who wanted a business loan to have an arbitrarily low interest rate on potential investments due to the lack of treasuries setting a functional floor? Sure, who wouldn't want to be able to use money and pay it back without having to pay interest on it?

Would it be beneficial to be able to take out a mortgage with an arbitrarily low interest rate and only have to pay the amount you were loaned? Sure, again, who wouldn't want to do this?


On the other hand, what motivation is there for someone to give out a loan if there is no return?

Yes, altruism is wonderful, I'm a socialist, I think it would be the best if all men were angels, but that is not the case.


If I loan you money with nothing stabilizing interest rates in any way, while I hold debt I am unable to use that money, when the debt is repaid I am in the same state as I began, minus the potential opportunity cost of not having the cash available for things which may have come up while you had the money.


If I want to set aside some money for the future, is there no way I can protect it against the risks of inflation? Why should a bank give me an interest rate above some arbitrarily small value? What benefit would there be for them to do so if I have no possible alternative methods to invest in?
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Re: 1083: "Writing Styles"

Postby rattusprat » Mon Jul 30, 2012 4:03 am UTC

Max wrote:On the other hand, what motivation is there for someone to give out a loan if there is no return?

Two random counter arguments to this random point:
1. But the banks don't "loan out" the money, they "conjure" it based on your promise to repay the loan - it's not the same as me lending you $50 for a cab home from the pub. If you assume the borrower is going to repay the loan then a "nominal" interest rate is enough. If I'm allowed to write $300,000 on a piece of paper and give it to you putting up nothing of my own, and there's a 99.9% chance you're going to pay me $31,000 (% of capital plus nominal 0.3% interest) a year for the next 30 years, so that I make $1,000 a year for 30 years, then that might look like a pretty good investment to me.
2. The GFC was (simplisticly) a result of banks lending money to people they didn't think could repay, and then either selling the debt to some other sucker, or assuming the "return" would be repossession of the house loaned against. Unfortunately with too many houses repossessed they became worthless.

J Thomas wrote:We have created a system that's so complicated it's almost impossible to understand. I consider that a fundamental design flaw, right there. When smart people like you make utterly bogus arguments because the system is incomprehensible, how likely is it that the system is working well?

I find it ammusing that you guys have spent two pages discussing the complexities of the current sytem that is all made up. There is no "real" debt - the government never has to actually pay it back (as I believe stated by both of you), money has no "real" value.

If all the governments of the world got together and decided "screw the banks", they would have the power to pass laws to abolish the central banks, write off debts owed by governments to banks, possibly convert Treasury bonds to to legal money (rather than perpetual obligations for the governemet), and *poof*, all (most) government debt disappears. They could say "congratulations, all the money in your bank account is now debt free, no need to keep this charade going any longer". Perhaps some of the millions of people who earn a living sitting in front of 4 computer screens moving other peoples money around could get a job that is actually productive to society. Unfortunately, though, the banks have too much power to let this happen.

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Re: 1083: "Writing Styles"

Postby J Thomas » Mon Jul 30, 2012 4:59 am UTC

Max™ wrote:
J Thomas wrote:And the yield on treasury bonds is partly set by the Fed. and meanwhile the Fed manipulates the amount of private borrowing to influence the inflation rate. So the various parameters you are talking about are fundamentally arbitrary.

Yes, I know, I am not arguing that point. I am saying that the existence of treasuries allows one to usefully gauge the relative risk vs return of another investment. If the risk is greater but the return is the same or less than a treasury bond, it is a bad investment.


I must be missing your point. If you predict the ROI for two investments, you can compare them. So what?

One of the values for the models is that they let you say things more clearly. And they help you think more clearly. ....

I again must note that if I am not speaking of a mathematically defined statement or a basic observable property, I am very rarely speaking of something which I think is absolutely true.

At most I only go up to "useful to consider as though it were true in a particular situation", I don't like beliefs, my brain screams at me when I deal with them.


Agreed.

The properties of treasury yield curves and their influence on things like mortgage interest rates or the stock market are not particularly controversial, there are numerous models already in existence relating to them, I'm not particularly interested in reinventing this wheel.


You agree that one major effect is usually to make mortgage interest rates higher, and stock prices lower, right? Do you argue that this is a good thing? Who is it good for?

Maybe part of our miscommunication is that you are using a financial definition for investment, where I think an economic definition is more appropriate.

A financial definition will say that you are investing when you give money with a solid expectation you will get more money back. A solid expectation usually involves promises by people whose word is known to be good and who will probably have the money so they can keep their word. In that sense the US government is maybe the best investment in the world.

Well, I would say "when you give money with an intent to get more money back", not all investments are sound, but you are right that a well informed investment will have a solid expectation of positive returns.


Sure. So consider -- safe investments involve people who do not need the money. If you are sure they can pay you back with interest, they are already doing very well. Mostly financiers prefer to lend to people who have no need to borrow. It's safer that way.

By an economic definition, though, you invest when you buy stuff that will be used for future production rather than consumed. The intention is that there will be more and better stuff to buy because of the money you spent. It isn't an investment when Wimpy tells you "I will gladly pay you Tuesday for a hamburger today.". It isn't an investment when Wimpy tells you "I will gladly pay you extra Tuesday for a hamburger today.". It might be an investment if Wimpy tells you "Buy me a hamburger bun and a sack today, and I will catch pigeons in the park and sell them and pay you back more than your money by Tuesday.". You have to analyze how likely he will succeed.

In an economic sense, what do Treasury bonds pay for?
Medicare/Medicaid 24%. This may be worth doing, but it is not an investment.
Social Security 20%. Ditto.
Defense 19%. Ditto.
Non-defense discretionary 19%. Maybe.
Other. 12%. Maybe.
Interest. 6%. No.

This sort of thing is hard to split up accurately. Like, the interest is more like 18%, but much of it goes to pay interest on bonds bought with the Social Security money. That doesn't get counted as interest because the government is paying the interest to itself. It doesn't really count when the government just pays the money to itself, right? Except that when the SS crunch comes the government has promised it will pay off a lot of those bonds to give to SS recipients, and the money is already spent. Why doesn't that count as debt and interest on the debt?

And various government initiatives have paid off very well. Lots of military spending has been entirely wasted, but then there's the internet, and maybe nuclear power, and a variety of civilian technology was first developed for the military and then allowed to be useful when the military didn't want it. Hard to tell how much of it wouldn't have happened anyway. But it's hard for me to figure that more than say 30% of government debt was investment. And now the money is spent and we're still paying interest on it, except that no, we aren't paying the interest, we're borrowing the interest along with the other new non-investments we pay for.

Meanwhile, if you have some brilliant idea to create new products, you will pay more interest than you otherwise would because the absolutely safe federal debt provides an artificially good alternative. Except it isn't that simple. We have created a system that's so complicated it's almost impossible to understand. I consider that a fundamental design flaw, right there. When smart people like you make utterly bogus arguments because the system is incomprehensible, how likely is it that the system is working well?

I'm not making a bogus argument about treasuries being safe investments.


In an economic sense they are not investments at all. Your money is not being spent to create wealth. The difference between this and a Ponzi scheme is that Ponzi schemes depend on larger and larger numbers of people investing so that the previous investors can be paid off. While with this uh.... I was sure I'd found a difference but now I've forgotten it. Maybe you can think of the difference.

I'm not making a bogus argument about treasuries existing because of the debt financing situation we are in.


The debt financing situation we are in is there because we made it be that way. It was a choice. It did not have to be like this. We chose for the Federal government, the only institution that is legally allowed to create money, to instead borrow its money from bankers. I may have missed your point, but it sounds to me like you're claiming this was not utterly stupid.

You may disagree that treasuries existing is a positive thing, but if there are benefits from treasury bonds being a part of the economy, then those benefits can be connected to the existence of the debt.


Sure. And if there's a dead cow lying in your pasture, bloating up, and there are maggots feasting on it, you can point out what a great benefit the cow is to those maggots.

So what money value would you place on those services? And who benefits from them?

A whole lot of T-bonds are bought by banks. A long time ago banks were required to hold cash reserves to cover possible withdrawals -- as much as 20% or 25% of the money they owed. But with the Fed etc there is no danger of bank runs, and individuals are not allowed to withdraw large sums of money since they might use the money for drug deals or terrorism, so banks have less than 1% reserves. The law is still sort of there, but Federal Reserve members must instead have 10% reserves on deposit with the Fed, and they are allowed to hold the rest as interest-bearing T-bonds. Also, some rich people would pay more taxes on actual investments which would also be more risky. So they do better to keep part of their wealth in the form of T-bonds. On both cases, the ones who buy T-bonds do so because the laws are set up so they do better that way. If we passed a law that you had to buy T-bonds with 5% of your income each year as part of your retirement plan, then you would get the special benefits of T-bonds too.

I say that this debt provides an advantage to financial investors, at the expense of economic investors. If you want to lend money, you have a floor under your price that's set by the Fed. If you want to borrow money for actual investments, to make things and sell them, there's a floor under the price you must pay. Of course financial investors like to have a guaranteed profit. But the result is to make it harder for people who actually want to produce things, to get the capital together to do that.

Why do you want to help people who want a sure profit over people who want to actually improve the economy?

You're misrepresenting my argument here.


I don't think you made the argument this way. I'm saying that this is a consequence of your argument that you perhaps did not notice.
Would it be beneficial for someone who wanted a business loan to have an arbitrarily low interest rate on potential investments due to the lack of treasuries setting a functional floor? Sure, who wouldn't want to be able to use money and pay it back without having to pay interest on it?

Would it be beneficial to be able to take out a mortgage with an arbitrarily low interest rate and only have to pay the amount you were loaned? Sure, again, who wouldn't want to do this?


But interest rates won't get arbitrarily low. They could be regulated by supply and demand, if supply and demand worked to regulate things. Some people argue that free markets do not work, that the whole American belief in such things is rank superstition. I say that markets can work well if they are designed well.

On the other hand, what motivation is there for someone to give out a loan if there is no return?


If there are too many people trying to loan money and not enough good credit risks want to borrow, then lots of people will not lend. That's how it ought to be in that case. If you have money and no good prospects for lending it, you could start your own business and try to make money that way. Or have fun spending the money. Or leave it under your mattress waiting for a chance to do some good with it. Nobody gave you a guarantee that there would be good investments available. If too many people want to invest and too few want to consume, the economy won't work right.

Yes, altruism is wonderful, I'm a socialist, I think it would be the best if all men were angels, but that is not the case.

If I loan you money with nothing stabilizing interest rates in any way, while I hold debt I am unable to use that money, when the debt is repaid I am in the same state as I began, minus the potential opportunity cost of not having the cash available for things which may have come up while you had the money.


Yes. Supply and demand. If the competition is too stiff among lenders, some of them will drop out of that market.

If I want to set aside some money for the future, is there no way I can protect it against the risks of inflation?


The way we do it now, the Fed decides what their inflation target will be and they do various things to hit that rate. You can probably protect your savings from inflation because the Fed is run by and for bankers, and they want to protect their savings from inflation too. But there are no guarantees. If you think inflation will be too high, then you should spend your money now. Either buy consumables and have fun with your money (beyond the cushion you might need) because it will buy less later. Or invest in tools etc that you can make money with. Tools etc that you can expect will cost more later.

Why should a bank give me an interest rate above some arbitrarily small value? What benefit would there be for them to do so if I have no possible alternative methods to invest in?


I didn't catch that. Are you saying, why should a bank let you lend money to them at some high rate of interest? No reason. They don't.

Look at the bigger picture. Ideally we would have a system with workable feedback loops. We'd get some good level of investment versus consumption. We'd arrange a reasonable balance between consumption today and consumption in the future. We'd get a sense of how much to spend on R&D versus increased production of present products. Lots of variables to balance. Some people have a theory that free markets do the best possible job of that. So look back. When we got out of the Great Depression and the command economy of WWII, lots of people had money (because they worked hard but couldn't spend it during the war, they had to put their money into war bonds instead.) And a lot of consumer goods were in short supply because we hadn't made much during the depression or the war. The rest of the world economy was bombed. We had a lot of new technology that wasn't being used much. We had room for a lot of prosperity, more than ever before. By the late 1960's things were getting way unbalanced. Some people said it was because Johnson wanted his social programs and his war both, and he couldn't pay for both, so he lied about the spending. The feedback loops failed because he lied. Then there was Vietnam, tremendously expensive, more bombs than we dropped in WWII. Nixon couldn't figure out what to do and tried price controls. Kissinger wasn't paying attention and told the Shah of Iran it was OK to get OPEC working. That was a disaster. Pretty soon The Shah and the King of arabia were both dead, but that didn't seem to help much. It's been rocky ever since. People talk about the oil a lot, but I'm not sure how central that is. Definitely important but maybe not as much as the hype. If we believe we'll die without oil then we put up with middle east wars better. Then there's the technology -- a lot of the development happens other places, and a whole lot of the manufacturing. There's the industrial automation.

It isn't clear how to design a system with the right feedbacks, but probably we don't have it now. Or maybe we face such gigantic changes and such humongous uncertainty that any feedback system would be overwhelmed.

What we have is a system that's supposed to guarantee investors a profit even if they don't produce as much. Guarantee investors a profit even during recessions when the economy does worse. There's a theory that your money should be due a profit when you put it to work. Why should you get a guaranteed profit above inflation when your money is not in fact being used? What kind of feedback is that?

There is a theory that the government ought to spend extra money during recessions to help the economy out, and then spend less during the good times. That way the government could help even out the extremes. Possibly we ought to try that. But is what we have now just a bad time? If it's like old recessions then after it's over we'll have a boom and make enough money to make up for the slowdown. What if it just isn't going to go back to the old way? What if conditions have changed, and we have to adapt? The government gravy train is necessary to an extent to take care of people who can't meet their basic needs, but what if it interferes with adaptation and the good times that would pay for it aren't coming?

We might be heading toward third-world status. A few super-rich people, a lot of extremely poor people, and a fairly small middle class that works as hard as it can to stay middle class. Is that inevitable? Are there people working for some of the super-rich people who are trying to make it be that way? That would be good for the environment, if we lived in giant slums around the cities and not spread out in suburbia, if we mostly didn't have cars, if we stopped eating so much beef, etc. I could imagine super-rich environmentalists who would want it. Not to mention super-rich aspirants to aristocracy. How could we head in some other direction? Is there any way?

Not by doing things the way we've been doing them. The government which officially gave itself the monopoly right to create money, instead borrows its spending money at interest from fractional-reserve banks.

And you are talking as if you don't consider that a travesty.
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Re: 1083: "Writing Styles"

Postby Max™ » Mon Jul 30, 2012 7:44 am UTC

I never said fractional reserve banking was good, nor that the current economic arrangement is good.

I just said arguing about debt as though it were household debt and exclusively bad is wrong.


As for the free market, that is a bunch of bullshit idealism, there is no such thing, and it is based on preposterous assumptions that have never been borne out in reality.

It is much like pure communism in that sense, actually.
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Re: 1083: "Writing Styles"

Postby J Thomas » Mon Jul 30, 2012 1:31 pm UTC

Max™ wrote:I never said fractional reserve banking was good, nor that the current economic arrangement is good.

I just said arguing about debt as though it were household debt and exclusively bad is wrong.


Ah! I completely misunderstood. So now I want to suggest that perhaps the reasoning that people use to say that household debt is exclusively bad, is wrong. Household debt can be a good thing, in the same way that government debt can be a good thing.

How many people can afford to buy their home paying cash? Most of the people who can do that live in trailers. (Or yachts.) If you save up your money to buy a current-style home, you're going to be paying rent for a long time. Lots of people never completely pay off their mortgages. You start paying it down, and then your kids go to college so you take out a second mortgage. You start paying that down, and then you sell your share of the house and buy a retirement cottage. Or rent. Until you're ready to go to a nursing home, or live on the street or something. Debt lets you live in a house much finer than anybody would rent to you. You can have more house than you can afford to buy, and it's kind of like rent but different. Mortgages aren't a bad thing! They're a very good thing! It's because of mortgages that the US housing industry is where it is today. They have a big effect on the whole economy.

Similarly credit card debt. If you buy stuff on your credit card today, and you pay it back with interest on payday, that's your choice. Isn't it better that you can have that choice than not have the choice? It's worth it to you to buy now and pay more later, or you won't do it. You might find things on special sale now, and the sale will be over by payday. You can save money buying on credit. And if you don't pay down the balance? That gives you a sense of what's worth investing in. Like, you could buy software to help you write webcomics, or you could pay the interest on your credit card debt. Unless you think the website will make more than 1.5%/month, you should put the money into your card instead. See? Without the debt to judge by, there's no telling what foolish investments you might make. Your debt and the continuing charges are helping to keep the economy moving, too. If you paid it off there would be less money in circulation. When you keep paying years later for those cartons of cigarettes that went up in smoke a long time ago, you are aiding the nation's prosperity! Just like the national debt.

People have the idea that it's better to have a lot of money than to owe a lot of money. That's because they're thinking about what's good for them. But the fact is, none of us are the US government. If the US government goes deeply into debt, how does that hurt us? Suppose the government goes deeply into debt buying bombs it intends to never use. The result is that you can get a make-work job in the defense industry. You can tell people that it isn't make-work because you're making the bombs the nation needs to defend us. But the point is, you have a job and you might not if the government didn't create that job for you. If instead the government was rich how would that help you? The more money the government spends on you, the better off you are. That's the bottom line, not how well off the government is.

As for the free market, that is a bunch of bullshit idealism, there is no such thing, and it is based on preposterous assumptions that have never been borne out in reality.

It is much like pure communism in that sense, actually.


Yes. Though communism is fundamentally a moral idea, while free-markets are more of an oversimplified systems concept. The argument goes, feedback systems can regulate things. Free markets provide a feedback system. Somehow beyond our understanding the way that free markets regulate things must be the best way to regulate things, so whatever a free market gives you must be what you should have.

But it surprised me to hear you say that one important virtue of having giant gobs of government debt is that it reduces the feedback about how much investment is needed. It provides a great big buffer that helps insulate "investors" from the realities of production. I can imagine that might be a good thing, but you talked as if it was so obviously a good thing that no argument was needed why it was good.

Why is it good that people who want to park their money and get interest on it, can buy government debt instead of debt that is somehow tied to making something that somebody will value?
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Re: 1083: "Writing Styles"

Postby Max™ » Mon Jul 30, 2012 7:51 pm UTC

Because the alternative to government influence on any market has always been wild fluctuations and crashes?
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Re: 1083: "Writing Styles"

Postby J Thomas » Mon Jul 30, 2012 9:35 pm UTC

Max™ wrote:Because the alternative to government influence on any market has always been wild fluctuations and crashes?


Certainly we need influence by somebody responsible. Otherwise we get all sorts of abuses like Ponzi schemes and banks.

What surprises me is that you would think the best way for the government to influence the economy is to take out giant interest-paying loans from banks and so give the banks increasing influence on the government.

rattusprat wrote:I find it ammusing that you guys have spent two pages discussing the complexities of the current sytem that is all made up. There is no "real" debt - the government never has to actually pay it back (as I believe stated by both of you), money has no "real" value.


There is a potential problem that the economy currently depends on people's belief that the government's promises will be kept. If they come to believe the promises will not be kept then government promises are no longer money.

If all the governments of the world got together and decided "screw the banks", they would have the power to pass laws to abolish the central banks, write off debts owed by governments to banks, possibly convert Treasury bonds to to legal money (rather than perpetual obligations for the governemet), and *poof*, all (most) government debt disappears. They could say "congratulations, all the money in your bank account is now debt free, no need to keep this charade going any longer". Perhaps some of the millions of people who earn a living sitting in front of 4 computer screens moving other peoples money around could get a job that is actually productive to society. Unfortunately, though, the banks have too much power to let this happen.


There would have to be some sort of feedback systems to replace the current flawed ones. I think it's interesting to imagine what it is that's needed and how it could work.

To get a big change like you describe, we would need a previous big change to respond to. We couldn't just change the system around because we wanted to, because as you point out the bankers would not want to and also it's very hard to get a whole lot of people to agree about anything.

We could get a big change after an epidemic that killed say 20% of the population. That would be such a big emergency that we couldn't keep doing the same things while it was going on, and we couldn't expect to go back to the old stuff after it was over.

We will definitely get great big changes if we lose a major war. The victors would presumably set up some sort of puppet government arranged their way, and eventually they would go home or something and we would have to build a new system we liked, and there's no reason to copy the unworkable details that most people didn't even understand from the old system.

9/11 seemed like a big change at the time. People went around saying that the world had changed, and they were sad that we couldn't have the kind of America we used to have. But hardly anything changed, really. We just lost our freedoms, and we got a lot of new security jobs and some new wars. Life went on pretty much unchanged, the freedom didn't make a lot of difference in people's lives.
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Re: 1083: "Writing Styles"

Postby Pfhorrest » Mon Jul 30, 2012 9:51 pm UTC

I know this conversation has moved on since this, but I've been on vacation...

Max™ wrote:
Pfhorrest wrote:What if we got rid of the monopoly on money entirely?

Let anyone issue any kind of money they like. Whether that has any value to anyone else, and thus gets used for anything, will depend on each issuer's monetary policy; what it's backed by, its inflation rate, etc. Currencies which stably retain value and yet are widely enough issued to conduct all the transactions we need to conduct would become most popular and the de facto standard. To do that they would need to be backed by some widespread but scarce resource of stable value; or some diversified portfolio of such resources. They could even be that ABCD$1.00, in essence, equals "IOU one share of this holding company owning a huge, extremely diverse and therefore relatively stable, stocks and commodities portfolio" -- and that, taken to the extreme, could even approach what really makes most sense, ABCD$1.00 = one share of the economy.

Well, how do you back up the value of your currency?

If you'll read that again, you'll see I'm suggesting that each issuer of money backs it by whatever they choose to back it by. Money backed by things of stable or stably rising value will be more popular with users of money, and those currencies will become de facto standard currencies widely used throughout the economy. Precisely like how money arose from barter: commodities which were widely and stably valued became good to store and exchange value in a more abstract way. (Of course other useability factors were involved as well -- durability is good or storing value, transportability is good for exchanging value, etc -- and other factors would be involved in the market selecting a de facto monetary standard as I am suggesting as well, e.g. coin vs paper vs electronic forms. What it's backed by is only one feature of money, albeit a big important one).


If we all had our own currency, but you held debt in my currency, my currency value is stable as long as the debt exists, since you need my currency to pay the debt.

If the debt is suddenly payable in your currency or steve waterman currency (let debt = debt', YES?) why use mine?

Why would it suddenly be payable in another currency unless you (the original creditor) accepted that currency? And why would you accept that currency unless you considered it valuable? And why would you consider it valuable unless it was backed by something widely and stably valued?

I'm not suggesting that everyone issue their own currency. I'm suggesting that there be a market for currencies, and those which are best will become the de facto standards.

For a rough analogy, imagine you could suddenly build your own floating island nation in the middle of international waters, and commence trade with the rest of the world. You have a wide variety of currencies to choose from to conduct that trade with, and there will probably emerge from that international money market a currency which is your preferred one -- likely the one which is mode widely and stably valued, something like USD or EUR today -- which you would request payment in and, having larger stores of it, offer payment in. All I am asking is why should states be the only issuers of money, and why should such a money market only exist internationally?

I also made a suggestion, which could be taken together with or independent from the preceding idea, that a stable and widely acceptable backing for a currency would be an extremely diverse portfolio of different commodities and stocks. For ease of thought lets use the US government as the hypothetical issuer of this currency, and call the unit of currency a dollar. Instead of acquiring large amounts of gold or silver and backing money by that, as they did in the days before fiat money, they would acquire large amounts of a huge variety of different commodities, including gold and silver but also corn and wheat and stocks in IBM and Boeing and so on, and every dollar issued would be in essence one "share" of this huge, stable investment portfolio. The value of a dollar would go up as the value of the investments backing it went up, and new dollars could be issued commensurate with that increase so that the value of the dollar stays stable and there is increased money in circulation to enable the exchange of the increased value on the market. Who do those new dollars get issued to? How about anyone who can offer some stock or commodity of equivalent value -- buying new backing with the new dollars, so you're not really diluting anyone's "share" of the mass investment since you've grown the investment with each new issuance. That same mechanism can be used to grow the currency from the start -- you get some initial investors to offer some stock or commodity in exchange for a dollar backed by the portfolio of such investments, in essence jointly investing in each other, and then as that grows you issue more dollars to new investors and eventually you have a huge diverse investment portfolio and a bunch of dollars in circulation backed by that portfolio.

And if other parties are doing something similar, then whoever picks the most stable investments and manages the issuance of new currency best (and offers currency in the most usable form factor, etc) will win out on the money market and their currency will become the de facto standard. If they start to mismanage it, then people will start to prefer another currency instead, and the de facto standard will shift.
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Re: 1083: "Writing Styles"

Postby AdmiralGreene » Tue Jul 31, 2012 12:47 am UTC

This discussion reminds me of this show.
http://tvtropes.org/pmwiki/pmwiki.php/LightNovel/SpiceAndWolf?from=Main.SpiceAndWolf

There was one episode, can't remember which one, that went into in-depth discussion about different currencies and currency markets and such.

(Beware, that link goes to tvtropes)

Edit 1: Added relevancy

Edit 2: Stated Edit 1 (and 2.)
Last edited by AdmiralGreene on Tue Jul 31, 2012 11:42 am UTC, edited 2 times in total.
I suppose I should state something clever, no?

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Re: 1083: "Writing Styles"

Postby rattusprat » Tue Jul 31, 2012 10:31 am UTC

J Thomas wrote:To get a big change like you describe, we would need a previous big change to respond to.

Recent wars, including those born out of 9/11 (dont get me started), have been waged at least partly because they are very profitable (especially for the winner). Profitable for who? The banks.
Wars are generally won by someone, and with multinational banks effectively working both sides, war is unlikely to cause a worldwide change. Unless of course it is accompanied by a nuclear (or robot) apocolypse.

What about running out of oil (or other natural resources)? It's going to happen (if it hasn't already started to happen). There will come a time when the perpetual economic growth by increase of production and/or increase in population required by the current system is physically impossible, and the world will need to come up with something more sustainable.

Soylent Green anyone?

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Re: 1083: "Writing Styles"

Postby J Thomas » Tue Jul 31, 2012 1:52 pm UTC

rattusprat wrote:
J Thomas wrote:To get a big change like you describe, we would need a previous big change to respond to.

Recent wars, including those born out of 9/11 (dont get me started), have been waged at least partly because they are very profitable (especially for the winner). Profitable for who? The banks.
Wars are generally won by someone, and with multinational banks effectively working both sides, war is unlikely to cause a worldwide change. Unless of course it is accompanied by a nuclear (or robot) apocolypse.

What about running out of oil (or other natural resources)? It's going to happen (if it hasn't already started to happen). There will come a time when the perpetual economic growth by increase of production and/or increase in population required by the current system is physically impossible, and the world will need to come up with something more sustainable.

Soylent Green anyone?


The obvious way for that to settle into is some sort of feudalism. The owners own the economy and choose what they want it to produce, for themselves and their serfs. Everybody else just tries to get by as best they can, on whatever leftovers the owners gift them.

That's likely to be the ground state. If we want something else we have to create it.
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