We Have a "Paying For It Problem"

[OldWiseGuy]

I would rather not owe anybody any money in the first place, which is why I have a $0 balance on my credit card. I don't spend money that I don't have.

Isn't it ironic that those of us who don't carry a cc balance are called 'deadbeats'.

 

[contango]

Higher prices translate to higher paychecks, which are needed to maintain a high standard of living. Using cheap foreign labor is destroying our standard of living. It's the competitive race-to-the-bottom pricing, i.e. Walmart that is dragging wages down while at the same time living costs are rising.

In theory that can work but what seems to happen on the ground is that prices go up while wages go up more slowly, if at all.

The cheap foreign labour seems to have created the storm of "inflation in the things you need, deflation in the things you don't". So while the basket of goods used to calculate official inflation figures contains some items that rise and some that go down, when a household's budget is being stretched they spend a greater proportion on things they need (food, heating oil etc) that rise with little respite and less on things they don't need (foreign made TVs, computers etc) so the effective rate of observed inflation from their perspective bears little resemblance to the official figures.

Our ecomony is like a giant Monopoly game that keeps adding players but insists that no new money is added. Economists believe that the 'velocity' of money will make up for lack of volume. In a perfect world this might work but the velocity virtually stops when money enters the banking system.

I'm not sure it's fair to say that no new money is being added. The whole QE processes are about introducing money - it seems to me the problem is that the money goes into the system at the top end and never makes it much further, so you end up with a small huddle that gets first dibs on all the new money while the masses see very little of it.

But the real problem is the trade deficit, which actually goes back to the end of WW1 when we loaned Europe money to rebuild their economies. Instead of buying American products and services they traded amongst themselves using our dollars to support their weak currencies (that was the beginning of our dollar becoming the global 'reserve' currency) and the beginning of the drain on our dollars (we loaned them yet more during and after WW2), and a succession of presidents kicked that can down the road never insisting that those loans be repaid.

Because those dollars are still in circulation they must be kept 'on the books' as if they were still in our domestic economy. And because there are so many of them out there we must uphold their value. We are victims of our own success in this regard.

Because they are still in circulation they need to be honoured, but if the problem is the number of dollars out there then adding billions of new dollars through QE programs isn't going to help.

Even looking at Bernanke's moniker of "Helicopter Ben" after his comments about dropping money into peoples' back yards as if from a helicopter (speaking figuratively of course), the fundamental problem is that if people lack confidence in the future they spend less money so even if you literally drop bundles of money out of a literal helicopter into their back yard the chances are they'd just use it to pay down some debts. Making ever-more money available to borrow when people don't want to borrow becomes like trying to push on a string.

 

[OldWiseGuy]

I'm not sure it's fair to say that no new money is being added. The whole QE processes are about introducing money - it seems to me the problem is that the money goes into the system at the top end and never makes it much further, so you end up with a small huddle that gets first dibs on all the new money while the masses see very little of it.

QE adds debt, not equity. We can't borrow our way to prosperity. Those at the top of the food-chain are the banks, who make large loans to corporations that offshore their production. They get those loans because they can show a greater profit potential than companies that pay the domestic workforce more in wages and benefits.

Making ever-more money available to borrow when people don't want to borrow becomes like trying to push on a string.

Intoducing money into the economy through the banking system ensures that we will be forever in debt. That's why my idea is to pay for government contracts directly from the Treasury, not through new debt created by the Fed. This will eliminate public debt over time. The banks can still operate in the private markets. Inflation can be controlled through price controls on government projects, taxation, and the budget process.

But back to square one. The trade deficit is still the main culpert. Bring our dollars home through fair trade policies and many budget problems will be solved. If this causes hardship for some of our trading 'partners', so be it. If they go down it's not the end of the world. If we go down, it many be.

 

[contango]

QE adds debt, not equity. We can't borrow our way to prosperity. Those at the top of the food-chain are the banks, who make large loans to corporations that offshore their production. They get those loans because they can show a greater profit potential than companies that pay the domestic workforce more in wages and benefits.

What exactly are you referring to with the term "equity" here?

Borrowing our way to prosperity certainly seems very much like drinking our way to sobriety, although in fairness a short term strategy of borrowing to pay for something that will go on to fund the debt isn't necessarily a bad thing.

Intoducing money into the economy through the banking system ensures that we will be forever in debt. That's why my idea is to pay for government contracts directly from the Treasury, not through new debt created by the Fed. This will eliminate public debt over time. The banks can still operate in the private markets. Inflation can be controlled through price controls on government projects, taxation, and the budget process.

I agree that the endless production of debt with the associated interest charges mean that the debt will never fully go away. Paying directly through the Treasury seems like an interesting idea, although if the Fed is to be bypassed it would seem to make more sense to abolish it completely rather than ending up with effectively two currencies.

I'm not sure how your proposal would eliminate public debt over time - I can see how it might stop the debt from growing any further, assuming the budget ended up balanced.

Keeping prices under control by being a lot wiser stewards of public funding would be a good start although it seems to me there are vested interests in so many places in all political parties that it's unlikely to ever happen without a total overhaul of the way we do government in the west.

But back to square one. The trade deficit is still the main culpert. Bring our dollars home through fair trade policies and many budget problems will be solved. If this causes hardship for some of our trading 'partners', so be it. If they go down it's not the end of the world. If we go down, it many be.

How would you go about doing this? When the manufacturing capacity in the west seems to be largely decimated due to cheap offshoring it would take major investment to get it back. Even then the difference in labour costs are such that the only way to get manufacturing back in hand would be to either expect western workers to work for next to nothing or impose punitive taxes on imports. Western workers won't work for next to nothing and punitive taxes on imports merely mean even less money gets spent, so it would seem to cost more jobs that it would salvage.

Increasing taxes on imports is also a good way to incentivise smuggling and all sorts of creative descriptions on parcels sent into the country.

 

[OldWiseGuy]

How would you go about doing this? When the manufacturing capacity in the west seems to be largely decimated due to cheap offshoring it would take major investment to get it back. Even then the difference in labour costs are such that the only way to get manufacturing back in hand would be to either expect western workers to work for next to nothing or impose punitive taxes on imports. Western workers won't work for next to nothing and punitive taxes on imports merely mean even less money gets spent, so it would seem to cost more jobs that it would salvage.

Increasing taxes on imports is also a good way to incentivise smuggling and all sorts of creative descriptions on parcels sent into the country.

We don't have to bring manufacturing back. We need balanced trade to bring our dollars back. Once our dollars are back in the domestic economy they will find something to do, and it may not be in the manufacturing sector.

 

[variant]

I would rather not owe anybody any money in the first place, which is why I have a $0 balance on my credit card. I don't spend money that I don't have.

I don't cary cc balances either. But the interest on that is pretty high.

If you could take out loans at below inflation when you needed things that would not put you in trouble of not being able to pay off, then you would just be poorly manageing your finances.

 

[contango]

We don't have to bring manufacturing back. We need balanced trade to bring our dollars back. Once our dollars are back in the domestic economy they will find something to do, and it may not be in the manufacturing sector.

Balanced trade would mean we (the west as a whole) need to sell something to the Chinese of comparable value to all the plastic doodads they sell us.

What sort of thing are you thinking we might sell them that they need but can't provide cheaper than we can provide it? Already manufacturing is in the east because it's cheaper, ever-more work that can be done anyway is moving to places like China because people will do it for less, so finding something that they need but can't provide for themselves looks tricky to me.

Also presumably in order to "get your dollars back" you'd need to be selling more to China than you buy from China, so it needs the balance to be reversed rather than matched?

 

[OldWiseGuy]

Balanced trade would mean we (the west as a whole) need to sell something to the Chinese of comparable value to all the plastic doodads they sell us.

What sort of thing are you thinking we might sell them that they need but can't provide cheaper than we can provide it? Already manufacturing is in the east because it's cheaper, ever-more work that can be done anyway is moving to places like China because people will do it for less, so finding something that they need but can't provide for themselves looks tricky to me.

Also presumably in order to "get your dollars back" you'd need to be selling more to China than you buy from China, so it needs the balance to be reversed rather than matched?

Balanced trade would stop the hemmorage of dollars. We can still run a deficit with some third world nations as long as trade is balanced overall. I'm sure that China and Japan can find something to buy from us in order to meet a balanced trade agreement. As it is they are trading for our dollars as much as for our goods. Devaluing our dollars a little might help this as well, in fact some nations might be eager to unload even more U.S. dollars if the value fell enough. They might buy our stuff in order to get as much value as they can while they can if they thought they might be holding a bag full of devalued dollars. They might lock in contracts for all sorts of stuff if they thought the price was heading way up. This would be very good for us.

 

[GarfieldJL]

I don't cary cc balances either. But the interest on that is pretty high.

If you could take out loans at below inflation when you needed things that would not put you in trouble of not being able to pay off, then you would just be poorly manageing your finances.

I actually don't owe anyone any money, I don't have any loan I'm trying to pay off either. Thing is I don't spend money I don't have.

This "paying for it" problem is a joke, the problem is they are trying to play "santa claus" and stick the american people with the bill from the irresponsible spending.

Porkulous wasn't about helping the economy, it was about rewarding Obama's campaign donors.

 

[variant]

I actually don't owe anyone any money, I don't have any loan I'm trying to pay off either. Thing is I don't spend money I don't have.

This "paying for it" problem is a joke, the problem is they are trying to play "santa claus" and stick the american people with the bill from the irresponsible spending.

Porkulous wasn't about helping the economy, it was about rewarding Obama's campaign donors.

I don't think we should run our government based upon an ultraconservative model of personal finance.

 

[GarfieldJL]

I don't think we should run our government based upon an ultraconservative model of personal finance.

We shouldn't be running our Federal Government "the Chicago way" either...

 

[Jeffwhosoever]

I don't think we should run our government based upon an ultraconservative model of personal finance.

Reagan did a lot more good than Obama. Look at U-6 unemployment.

 

[variant]

Reagan did a lot more good than Obama. Look at U-6 unemployment.

I don't think the situations are easily comparable.

Also Reagan did not do anything close to what GarfieldJL is suggesting.

The current crop of Republicans aren't Reagan, and the current people in congress aren't comparable those in congress at the time.

 

[contango]

Balanced trade would stop the hemmorage of dollars. We can still run a deficit with some third world nations as long as trade is balanced overall.

It would stop the outflow of dollars but wouldn't address the debt.

I'm sure that China and Japan can find something to buy from us in order to meet a balanced trade agreement. As it is they are trading for our dollars as much as for our goods.

I'd have thought if there was anything of ours they wanted they would already be buying it. For all the dollar is currently the global reserve currency and therefore ideally suited to buying commodities such as oil or gold, there has to come a point at which China decides it doesn't want any more dollars.

China may end up using its dollars to buy US companies, in which case although the dollars return to the US the end result is likely to be worse for the country than if China just kept the bits of green paper.

Devaluing our dollars a little might help this as well, in fact some nations might be eager to unload even more U.S. dollars if the value fell enough. They might buy our stuff in order to get as much value as they can while they can if they thought they might be holding a bag full of devalued dollars.

Devaluing a little won't help, the dollar is already being devalued over time and it doesn't seem to bother international investors. It seems to me that if the holders of vast numbers of dollars get spooked that they are devaluing at an unacceptable pace and dump their dollars the end result is that the value of the dollar will decline, and that decline would hurt the everyday Americans who are just trying to make a living.

If the value of the dollar drops then imports become more expensive. What do people in the US buy that is totally unaffected by the price of imports?

They might lock in contracts for all sorts of stuff if they thought the price was heading way up. This would be very good for us.

Locking in a contract might be good in a very narrow sense but it still won't help the American people any.

Let's say for the sake of a figure that it's known the dollar is about to be devalued substantially such that what costs $10 will cost $15 next month. So China decides to commit to $1m worth of contracts at today's price, to save the $500k increase if they wait a month.

So the US firm gets $1m in nice American cash and in a month's time it pays its staff, who then find their money lost a third of its value. China gets the benefit, the US workers get the pain. That's not something I'd call "very good" for the US.

A short term loss in exchange for a longer term gain can be something that works although when so many people work with budgets that are very finely balanced a fairly small shock makes the difference between a budget that just about works and a budget that doesn't work at all. If your population is anything like ours there are going to be millions of Americans with little to nothing in the bank to fall back on, so your short term pain just pushed millions of people into a place where they can't pay their bills. Perhaps many of them could adjust if they dropped expensive cable TV packages, cellphone contracts and other non-essentials but you'll also have a lot of people whose budgets are already cut right back and who have nowhere else to go.

 

[OldWiseGuy]

It would stop the outflow of dollars but wouldn't address the debt.

First things first. Start with trade, proceed to a balanced budget, then address the debt. Regarding the debt; the first thing we need to do is encourage American investors to buy more gov't debt and thus return it to our shores where it is less likely to be used as a political or economic weapon against us. China is not our friend.

If the value of the dollar drops then imports become more expensive. What do people in the US buy that is totally unaffected by the price of imports?

I'm thinking that the inflation of wages would take care of that. Remember that we are going to devalue our currency by printing more of it. If Obama's minimum wage goes to $9 plus per hour, which bumps most other wages up as well, that will give Americans the money needed. China is already under pressure to revalue their currency upwards. To meet our devaluation they would have to devalue theirs yet further, possibly causing more economic pain for their own citizens. The wild card is the desire by the Chinese to enjoy the higher standard of living that they have been earning but not enjoying. They can only be put off by their gov't's highly political monetary policies for so long.

A short term loss in exchange for a longer term gain can be something that works although when so many people work with budgets that are very finely balanced a fairly small shock makes the difference between a budget that just about works and a budget that doesn't work at all. If your population is anything like ours there are going to be millions of Americans with little to nothing in the bank to fall back on, so your short term pain just pushed millions of people into a place where they can't pay their bills. Perhaps many of them could adjust if they dropped expensive cable TV packages, cellphone contracts and other non-essentials but you'll also have a lot of people whose budgets are already cut right back and who have nowhere else to go.

I admit that there will be pain, and not just for us. I think that hoping, or worse yet planning, for a painless recovery is unrealistic.

Even less realistic is the notion that we can 'compete' our way out of our trade problems. There is an ever-growing supply of cheap labor offshore. We will never outcompete them unless we reduce our standard of living to loincloths and mud huts (and you don't want to see me in a loincloth; not a pretty sight).

 

[contango]

First things first. Start with trade, proceed to a balanced budget, then address the debt.

It has to be one step at a time, I just don't quite see what you're suggesting as a solution to the trade deficit. If other nations wanted what we offer they would already be buying it. If they aren't buying it then we need to figure out what it is that they might want that they can't make themselves for less.

I'm thinking that the inflation of wages would take care of that. Remember that we are going to devalue our currency by printing more of it. If Obama's minimum wage goes to $9 plus per hour, which bumps most other wages up as well, that will give Americans the money needed. China is already under pressure to revalue their currency upwards. To meet our devaluation they would have to devalue theirs yet further, possibly causing more economic pain for their own citizens. The wild card is the desire by the Chinese to enjoy the higher standard of living that they have been earning but not enjoying. They can only be put off by their gov't's highly political monetary policies for so long.

We've been devaluing the currency for a while now by producing more of it, even though that currency has been in the form of debt. It has made the people closest to the fountains of money wealthier while making those further away poorer as prices have risen faster than their incomes.

If income goes up but the price of goods goes up faster then people are still no better off. They might feel wealthier but measured in terms of things they buy they are still behind the game. Put in simple terms if they used to earn a pizza in an hour but now earn 7/8 of a pizza they are poorer regardless of what numbers come after the $ sign.

I admit that there will be pain, and not just for us. I think that hoping, or worse yet planning, for a painless recovery is unrealistic.

A painless recovery is impossible from here - the only question is who takes the pain and how much of it they take. My prediction is the people at the top will barely notice, the people at the bottom will be sheltered by some form of welfare system and the people in the middle will be crushed.

 

[OldWiseGuy]

It has to be one step at a time, I just don't quite see what you're suggesting as a solution to the trade deficit. If other nations wanted what we offer they would already be buying it. If they aren't buying it then we need to figure out what it is that they might want that they can't make themselves for less.

These nations trade with us for our dollars as well as our goods. They get more value by purchasing goods from other countries with our dollars than from us.

We've been devaluing the currency for a while now by producing more of it, even though that currency has been in the form of debt. It has made the people closest to the fountains of money wealthier while making those further away poorer as prices have risen faster than their incomes.

My plan to pay government contracts directly from the Treasury will solve this problem. The bankers will still get a crack at it as it circulates through the economy, but will not get first dibs on it. It will go directly, without debt attached to it, to the companies and their workers and vendors. It's like transfusing a patient with fresh untainted blood. As it is we are putting tainted blood back into a patient hoping to make him better. Not a good idea.

 

[contango]

These nations trade with us for our dollars as well as our goods. They get more value by purchasing goods from other countries with our dollars than from us.

Which is the problem in a nutshell. In order to encourage them to purchase goods from us we have to offer better value. Unless we can figure how to offer better value the idea is a pipe dream.

My plan to pay government contracts directly from the Treasury will solve this problem. The bankers will still get a crack at it as it circulates through the economy, but will not get first dibs on it. It will go directly, without debt attached to it, to the companies and their workers and vendors. It's like transfusing a patient with fresh untainted blood. As it is we are putting tainted blood back into a patient hoping to make him better. Not a good idea.

Would you look to abolish the Fed completely or just have two entities that can create money? If the government creates money by printing it into existence rather than borrowing it into existence you still have the same issues with the money supply, all you've done is saved the interest that would have been payable had the money been borrowed. It does nothing to control where the money ends up and does nothing to control the problem of too much money chasing too few goods.

 

[OldWiseGuy]

Which is the problem in a nutshell. In order to encourage them to purchase goods from us we have to offer better value. Unless we can figure how to offer better value the idea is a pipe dream.

Exactly.

Would you look to abolish the Fed completely or just have two entities that can create money? If the government creates money by printing it into existence rather than borrowing it into existence you still have the same issues with the money supply, all you've done is saved the interest that would have been payable had the money been borrowed. It does nothing to control where the money ends up and does nothing to control the problem of too much money chasing too few goods.

Yes, abolish the Fed, but authorize and regulate the banking system. The Treasury Dept should control the money supply with Congressional oversight. Banks can be in the business of making loans but should seek their capital like any other business; raise capital by selling stock or attracting depositors. Inflation can be controlled through taxation and the budget process. Tighter trade policy will keep the money here. Of course there must be governing laws, perhap even a constitutional amendment.

 

[contango]

Exactly.

Did you have any thoughts on what those products or services could be?

It seems to me that we had anything that other nations wanted they would already be buying it so the problem is that either we have nothing they want or the price is too high. If we have nothing they want then we've got major problems; if the price of what we offer is too high the only way to address it is to reduce the price. Reducing the price means either paying people less, doing away with layers of regulation that increase the price due to costs of compliance, or reducing the number of stages products pass through between manufacture and retail in order to reduce the number of places a markup is applied.

Encouraging domestic consumers to buy locally made products is difficult with the existing price disparities - these could be addressed through the use of import tariffs but that is more likely to trigger a trade war and incentivise smuggling, or result in a collapse in consumer spending that would be catastrophic for the national economy. Alternatively domestic products need to be made more attractive to the consumer through either being cheaper for comparable quality or a higher quality for a comparable price.

Yes, abolish the Fed, but authorize and regulate the banking system. The Treasury Dept should control the money supply with Congressional oversight. Banks can be in the business of making loans but should seek their capital like any other business; raise capital by selling stock or attracting depositors. Inflation can be controlled through taxation and the budget process. Tighter trade policy will keep the money here. Of course there must be governing laws, perhap even a constitutional amendment.

I wouldn't have a problem with taking back control of the nation's currency but how would you go about abolishing the Fed without reneging on a substantial part of the national debt? If you renege on the debt you spook every possible investor in future bond issues as they know you may default on them without notice. If the Fed is going to be repaid and then disbanded the next issue is how to repay the Fed without also repaying other bond holders, and if the country could manage that it wouldn't have a budget deficit or a national debt in the first place.

Rising prices may be controlled by taxation up to a point but whenever taxation gets to a certain point people start to look for ways to avoid it. Heavy import duties encourage smuggling, heavy income taxes encourage people working for cash and so on. In the UK we have high taxes on alcohol and cigarettes which leads to the so-called "booze cruise" where people take a van to France and stock up on cheap wine and beer. It is also reckoned that even the "respectable middle classes" will buy cigarettes from smugglers if they are about 30% cheaper than legitimate outlets, so every time the government raises the tax on tobacco it puts more money in the pockets of the smugglers and, ironically, the French government.

It's honestly hard to see any way that the economy can be fixed short of either an explicit default (i.e. an open statement that the national debt isn't going to be repaid) or an implicit default (i.e. a massive devaluing of the dollar such that the debt is repaid but with currency that is all but worthless). Either way it's hard to see how the American people aren't going to get hosed in the process.