Advertising is (Mostly) a Waste of Resources

Advertising is (Mostly) a Waste of Resources

In 2008, the year for which I have figures (Outsell July 14, 2008 Third Annual Outsell, Inc. Study Forecasts $412.4 Billion in 2008 Advertising and Marketing Spending, of which $250 Billion or so was directly for advertising) That works out to some $830 for every man, woman and child.

Advertising and Marketing work out to about 3% GDP. But what is produced?

Advertising and conservation of money: People can only spend so much. They can only spend as much as they earn. Less taxes, of course. Oh, sure, they can go into debt, and spend more now. But that means, in the not so long run, they end up spending less than they earn, since they cannot spend what they lose in interest and charges on the loans they take out. Or they can save and spend a little less than they earn now, and in the not so long run, have a little more to spend than they would otherwise, assuming they gain a little extra in interest. But that’s it. That’s the most people can spend, and it doesn’t matter how much is spent on advertising. So advertising is at best a zero sum game. Advertising cannot make people spend more. In fact, if it encourages people to go into debt, it causes people to have less to spend, in the not so long run.

So spending on advertising is at best competing for a fixed quantity of dollars. But in the real sense the more resources are spent on advertising, the fewer resources are available for production of useful goods, and services, and the poorer society is. The poorer the consumer is. And the poorer the producer is.

Advertising is an example of what’s called a failure of composition: One business, if it advertises, gains a benefit in increased sales. But if all businesses advertise, then they all lose, because the market can only be so large. In fact, the market is actually smaller due to the fact that the more advertising, the more society’s resources are diverted from productive activities to paying for that advertising. The less money is available to produce other, perhaps more desirable, goods and services for society, so the poorer society is. Unless you consider money spent on advertising as a net contribution to society, like, say, art. But what kind of art does it qualify as?

Now what is true in general is true specifically for the holidays: The holiday shopping season does not increase consumer spending. Advertisers spend more, and yes, consumers do spend more during the holidays. But, they simply have only so much to spend each year, so the existence of a holiday season makes no difference in the total that would be spent each year, and thus the total that is spent.

Consider Black Friday. Where one store opens early, it has an advantage. Where all stores open early, there is no advantage, but all stores incur additional expense.

This brings us to a clear case where regulation makes an economy more efficient, and that case involves what used to be the so called Blue Laws. These were laws which banned most retail stores from being open one day a week, usually Sunday. (Pharmacies were a notable exception, but even they could only sell medical related merchandise.) Now as we argue, annual personal expenditures are conserved. That is, having seven days a week or six days a week of shopping makes no difference to the amount of money available to be spent. No more is spent in seven days than would be spent in six. Or looking at it the other way, no less would be spent in six than is spent in seven. But with stores open seven days, what we have is the increased expense of keeping those stores open the extra day. Since retail trade represents about 7% GDP, a reduction of 1/7^th of its (real) expenses would result in a 1% increase in the efficiency of the economy. About $130 billion, or about $430 would be made available for every man, woman and child in the economy. ( We say ‘real’ because we’re talking actual resource usage, electricity and wages, not nominal expenses like rent. Rent isn’t going to change, but paying rent isn’t consuming resources. It is merely a transfer of demand (for resources) from the retailer to the landlord. Also, the actual ‘real’ savings is probably going to be somewhat less, since heating, and cooling, of the store must be done seven days a week, to some extent, whether the store is open or not.)

This is another example of the failure of composition. Clearly, if just one store is open on Sunday, that store will have more business. It will take business from its competition. But with all the stores open on Sunday, we have seen that there can’t be more business for all the stores, and there is instead the added expense of the stores being open seven days instead of six. Having his store open seven days instead of six is, for a retailer, a very significant expense, an expense he passes on to his customers. His customers, paying more for each item, are not able to buy as much stuff, and so are less well off. Consumers pay, in real goods and services, real resources, for the convenience of shopping on Sunday.

Now something similar to the increase in efficiency which would be obtained by closing stores one day a week is being driven by increased retail selling over the Internet, which is reducing the number of brick and mortar stores, and thus the expense involved in operating them. On the other hand, Internet competition is forcing those stores which remain open to be as convenient as possible, thus inducing them to be open on Sunday.

Some advertising is desirable, bringing the buyer to the seller, and informing the buyer of his choices. But more than that is, from a social point of view, harmful, not because it influences buyers into making sub-optimal choices, (which it may,) but because it consumes resources to no one’s benefit.

The irony, of course, is that the billions of dollars per year spent on advertising have not lead to an increase in corporate profits, but rather an increase in expenses, and a decrease in profits. Though not in percentage of profit. Advertising simply does not increase the amount of money available for the consumer to spend, but its expense must be borne by all producers and consumers. The result is higher prices, and a reduction in the quantities produced and consumed. The more advertising, the greater the expense.

A technical note: The degree to which the producer or the consumer bears the cost of advertising depends on the relative elasticity of the supply and the demand, just as with taxes: Elasticity of demand is the ratio of the change in quantity demanded to the change of price. Elasticity of supply is the ratio of the change in quantity supplied to the change of price. A large elasticity implies a large change in quantity leads to a small change in price. A small elasticity implies a small change in quantity leads to a large change in price.

Now if demand is less elastic than supply, consumers bear the greater burden of the cost of advertising. If supply is less elastic than demand, producers bear the greater burden of the cost. From this, we would expect producers to spend more money on advertising relative necessities, such as food, than discretionary goods, such as automobiles, or jewelry.

But there is significant advertising in many discretionary goods, where the producer would seem to bear most of the costs.

Now in today’s global economy, where supply is often world wide, supply tends to be very elastic, and so for most goods, the burden of advertising is borne by the consumer. In the case of jewelry, and articles geared for the wealthy, for whom price would seem to be no object, it would appear that demand is relatively inelastic. Thus a disproportionate amount of money would be spent on the advertising of luxury goods. On the other hand, there does not seem to be so much advertising for interchangeable necessities, such as different brands of gasoline.

Morality and Debt

We have presented the producer-consumer problem as the basic problem in economics. (See: http://anamecon.blogspot.com/2010/05/greek-debt-and-producer-consumer.html )

However much money the consumer starts with, the consumer must spend his money until the producer has it all, and then the system collapses, (or the consumer runs into debt, and then it collapses.) When the market for the producer’s surplus collapses, the system then implodes. How then to maintain demand in the consuming sector, so it never runs out of money (demand) and will always provide a market for the producing sector?

We have used producing and consuming sectors in the original analysis, and as a kind of shorthand. We could generalize the problem and instead say the powerful and the weak sectors, where the real value of goods exchanged between sectors is equal, or even slanted so that the weak sector produces more than the powerful sector, and thus it is the powerful sector that is the ‘consuming’ sector. But the powerful sector is able to secure a greater proportionate revenue than the weak sector. (It uses its power to do this. We can define the powerful sector as that which is able to secure a higher proportionate revenue than the weak sector, defined as that sector unable to do so.) The powerful sector has a higher profit margin. And so it accumulates the money of the weak sector, and eventually acquires it all. Then it runs the weak sector increasingly into debt.

The moral implications of the terms producer and consumer, are, here, absent. In the reality, where the weak sector produces more than the powerful sector, they are inverted to appearances: The powerful creditor sector has not earned its wealth, but gained it through manipulation and force and fraud, that is, what ever instruments it has at its disposal that make it the more powerful, and the weak debtor sector has not become debtor through sloth. The weak sector is the producing sector, but its wealth is taken through the greater power of the creditor sector.

Does the creditor sector produce or consume? Well, the whole point of extending credit in the present is to, in the future, consume more than one produces. It is a matter of ordering. First, one produces more than one consumes, extending credit. Then one consumes more than one produces, collecting on the debt. However, this initial production by the creditor sector of surplus, to ‘hook’ the weak sector, is not necessary, but only the least unjust.

Whoever controls the flow of money controls the economy. The creditor sector need only start with a portion of the money. Then by collecting more in interest from the producing sector than the creditor pays the producing sector for what it consumes, the creditor sector will accumulate the money of the weak sector. This is the money of the producing/debtor sector. See:

http://anamecon.blogspot.com/2010/11/banks-are-forcing-debt-on-rest-of-us.html

And the video http://www.youtube.com/watch?v=rCu3fpg83TY&feature=related

Especially from about 32 minutes on, but watch the whole thing.

The consuming/creditor sector need not ever have produced anything.

Now the creditor sector seeks to loan to producers, because only producers can pay them back. Only those who produce more than they consume, who are net producers, can pay back loans, in any real sense. So either the creditor sector starts as a consuming sector, or it becomes one. The creditor sector must be a consuming sector, since in order to be paid back, it must allow the producing/debtor sector to produce a real surplus, and make the producing/debtor sector hand that surplus over. It consumes an ever greater portion of that surplus, as the producing /debtor sector becomes more in debt. The producing/debtor sector must become ever more in debt because there is never enough money in circulation to pay back the principal and the interest on the loans the creditor sector extends. This proceeds until the producing/debtor sector owes more in interest than it can produce, and must consume its capital to maintain payments. The creditor/consumer takes some of the production the weak producing/debtor sector needs to maintain itself and its production.

Thus we come to an inversion of the original problem. The consuming/creditor sector has the surplus of money, and the producing/debtor sector is starved of the money needed to support itself. It contracts. But it is leveraged against itself. That is, its nominal net income is negative, because the burden of what it owes, the interest burden, nominal interest times money owed, is greater than its profit margin times how much it produces. (The situation is even worse where a portion of the principal must be repaid.) So it is perpetually in the state of losing money That is, rolling over ever more debt.

Now the question arises: Why are corporations flush with cash? First, they are not. See: http://anamecon.blogspot.com/2011/10/today-were-just-going-on-little-about_09.html

Second, labor also constitutes part of the producing sector, and labor is losing money.

Why are the banks in debt? The banks are just a front. They owe also. Who do they owe? They owe themselves. That is, they are front corporations which, when they fail, will have no assets, but the assets will have been transferred to another corporation with the same owners. The one percent.

As the producing/debtor sector contracts, it is ever less able to repay its debts to the consumer/creditor sector, which debts increase even as the producer/debtor sector’s ability to repay decreases. Austerity cripples the producer/debtor sector, effectively making its debts larger and more difficult to pay back. More and more of its assets are transferred to the consuming/creditor sector, until the producing/debtor sector is stripped of its assets.

The details of this process are interesting in themselves. The consumer/creditor sector controls the quantity of money available to the producer/debtor sector. (But there is only money to pay the principal, never enough to pay the principal and the interest.) When it extends more credit, there is more money, and the price of things goes up. The members of the producer/debtor sector must borrow to keep up. (It is a failure of the commons. If no one borrows, no one has to borrow. If some borrow, the others have to, to keep up. Note also, the creditor/consumer sector can drive up prices by increasing its own demand, thus forcing increased levels of debt on the producer/debtor sector.) Then when the consumer/creditor withholds credit, there is less money, and the price of things, particularly assets, goes down. Not only that, when there is less money, there is greater unemployment, businesses contract, and, because money is needed to repay debts, more debts that cannot be repaid. Consider housing. By withholding credit, the price of houses is driven down. And there are more foreclosures.

Now it is argued that assuming a debt is purely voluntary, and that therefore the resulting indenture is essentially freely entered into. Assuming this excuses a process and result that is to many people intrinsically repellant, the assuming of debt may, under some circumstances, itself be compelled. Indeed, purely voluntary situations are rare. There is almost always some degree of force of circumstance, and often circumstance where one’s choices may be limited to a choice of evils. When the cost of living exceeds income, one is left with the choice of starving, or dieing of exposure, or assuming debt, and at least postponing the day of reckoning. Or, in the absence of universal health insurance, many are vulnerable to the choice of assuming debt or dieing of their malady. Similarly, where education is necessary to advancement in society, yet its results uncertain, one is left with the unhappy choice of almost certain poverty or a chance at either prosperity, if as a result of the education one secures adequate employment, or debt peonage if one does not. In either case, the debt must still be repaid, but in one case one is able to pay it off, and in the other one may not be.

Another instance where one assumes debt without choice is through agency, eg the government. Then there is the businessman seeking to preserve his business, or the farmer seeking to pay for planting his crop.

Then there is fraud.

And as ownership is concentrated, monopoly can be expected to be more and more of a feature of economic processes. It is the nature of monopoly to provide to less than the market needs, and people need to borrow to pay the rents collected by- those who extend credit.

In an environment where others assume debt, the resulting increase in the money supply drives up the cost of living, making it more difficult to sustain one’s life style without borrowing. Further, this life style may be deserved, that is a reasonable proportion of a person’s contribution to society. It is essentially unfair that someone who makes a considerable contribution to society be yet forced to live a life of penury. Yet those who blame him for the assumption of debt effectively condone this.

We have shown that being in debt need not imply a moral obligation to repay: The debtor, far from being lazy, may produce for society more than his fair share. Indeed, the lazy and indolent are not extended credit. Only the producers are sought out by creditors, who effectively seek to indenture them.

The debt may have been forced on the debtor, often by circumstance induced by the creditor. Even if not, the perpetual obligation often resulting from overbearing interest amounts to a form of slavery, and this is reprehensible.

The creditor has no implicit claim to moral superiority. Neither should the debtor berate himself as morally inferior, and as deserving of indenturship.

The true immoral behavior may thus be on the part of the creditor.

Links to Mansoor Khan

Here are active links to the articles Mansoor Khan refers to in his comment to Debt, Total Debt and by Sector. I encourage the reader to check them out. First:

http://seekingalpha.com/article/209386-modern-monetary-system-there-is-another-way

In Modern Monetary Theory, (as far as I understand it.) the government creates money by printing it, politically easy, once established, preventing inflation, and destroys it through taxation, countering inflation, politically hard. A government of reasonable virtue and principle would be required. A certain amount of inflation is more likely. Indeed, since debtors tend to be numerous, and creditors relatively few, a certain amount of inflation, which favors debtors, might counter natural tendencies toward the concentration of wealth. Compare this to what we see: Creditors have seized control of the government, and seeking to retain what are essentially ill gotten gains, are directing the government toward our common ruin.

(For a nice exposition of the problems with the current system, see:

Money as Debt:

http://www.youtube.com/watch?v=Dc3sKwwAaCU&feature=related

Or:

http://video.google.com/videoplay?docid=-2550156453790090544

And:

Money as Debt II:

http://www.youtube.com/watch?v=rCu3fpg83TY )

Next from Mansoor Khan:

http://aquinums-razor.blogspot.com/2011/08/what-is-relationship-of-money-to.html

And:
http://aquinums-razor.blogspot.com/2010/07/why-is-deflation-and-depression.html

http://seekingalpha.com/article/210346-should-newly-created-money-be-a-private-or-a-public-asset

Good. Helicopter money to every citizen. Give citizenship a tangible benefit, rather than the burden implied by the national debt. Negative taxation, which is precisely what the government should do when demand is depressed. And/Or it could guarantee employment, which would work as an automatic stabilizer.

http://seekingalpha.com/article/192375-cause-of-today-s-economic-crises-too-much-thrift

http://seekingalpha.com/article/160269-a-radical-solution-for-america-s-insolvent-financial-system

An orderly bankruptcy of the financial system, with the government as receiver.

http://seekingalpha.com/article/-great-banking-confusion-is-there-a-better-way

Mansoor's proposal for 100% non-lendable equity accounts seems doable. They would carry essentially negative nominal interest. The magnitude of this interest would be minimized by interbank competition for deposits.

Import Certificates: Another Problem and its Solution

Previously, we discussed problems with trade certificates and their use as a solution to the European debt crisis. Another problem with import certificates is that a country may require the importation of certain goods. It would not want to deprive itself of these goods by failing to issue certificates allowing their import. This might happen say, if Country A imported oil from Country B, but Country B didn’t import so much of the production of Country A. Country A would not want Country B to have to scramble around looking for import certificates so it could export to Country A a good Country A found necessary. Why should Country B bother? The issue is how to incentivize Country B to export to Country A the good Country A found critical.

The main incentive here of course is prices. The idea is that the money Country A gives to Country B for goods from Country B Country B can spend on Country A’s production. If Country B does this, spends this money, on Country A's production, trade is balanced. The problem is if Country B doesn’t want to spend Country A’s money. If Country B wishes to trade the Country A’s money with Country C for Country C’s production, and Country C then spend Country A‘s money on Country A’s production, all well and good. Trade is balanced. It’s when Country A’s money is hoarded that a problem arises. Indeed, Country A’s cumulative balance of payments is proportional to the quantity of its money that is hoarded by other countries, (minus the quantity of other countries’ money Country A hoards.) So the problem for Country A is to discourage the hoarding of its money. (Of course, Country A also wants to discourage the buying up of its assets.) Having its ‘trade’ money expire is one solution. This would motivate its quick expenditure. But Country A can’t just have ‘trade’ money, or money in foreign countries only, expire. All its money has to expire. But now we’re talking about inflation, the slow expiration of all its money. If Country A allows modest (moderate?) inflation, Country B is motivated to spend whatever of Country A’s money it has with reasonable speed, unless country A borrows it back at positive real interest, in which case Country B is again motivated to run up a surplus with Country A.

A balance must be maintained. Too fast inflation will discourage imports, ie cause a nation to be charged higher prices by one’s partners. Too slow will encourage hoarding of its money.

We note in the Greek problem, Greece is unable to inflate its currency, which would force other countries to buy from it, but is stuck with the common currency, the euro which, no matter how it inflates, will not encourage others to buy from Greece in particular.

Also, this seems to be an intrinsic problem with a country’s having its currency as the reserve currency, as other countries are naturally going to want to hoard that currency, thus, maintain a trade surplus with that country. Thus, that country will naturally tend to a trade deficit, and the economic ills attendant on that deficit.

Barring inflation, and returning to import certificates, another possible solution would be for some goods to be exempted. Exempted goods would generally be basic commodities, since exempting value added goods, unless they were capital goods, would not result in net real benefit to the importing country. This is an important point, which we will discuss eventually.

The importing country’s eventual goal of course, would be not to require the import of so great a quantity of critical goods, or at least to manage the exchange of export for import so the quantity of goods exempted would gradually be reduced, and eventually eliminated. This would result in a certain sort of self-sufficiency.

One could argue that a country requires all the goods it imports, or it wouldn’t be importing them, but for most value added goods there exists, internationally, a surplus of production, and therefore competition for that country’s markets. Indeed, there may be a surplus of factors in that country itself, idled by trade. There will, in fact, always exist a surplus of supply, because labor produces a surplus, which is not distributed down the labor chain, to the unemployed, who have no demand, (having no money) but only up.

The consumer of exempted goods would have to issue certificates at a less than 1-1 ratio, export to import, to other countries, or more specifically, for all non-exempted goods, if it were to balance its trade. Thus, if exempted goods constituted 10% of imports, its other certificates would have to be in the ratio 1 to .9, export to allowed imports, in order for that country to balance trade. Thus, it would face its other trading partners with a mercantilist appearance, unless it could assure these other countries trade with its suppliers of exempted goods. That is, it could give to these other countries the rights, the certificates, it earned from importing the exempted goods. Country A, importing oil from country B, gives to country C rights to export to country B, along with rights to its own market. Country B gives rights, certificates, because it has no desire to be exploited either. These rights, together with Country A’s own rights, would combine to a one to one ratio to Country C. Country A would experience a deficit with Country B, a surplus with Country C. Country C would experience a deficit with Country A, and a surplus with Country B. Country B would experience a deficit with Country C, and a surplus with Country A. But each country’s total trade would balance.

For a country such as the US, balancing its trade in just other than exempted goods, ie oil, would be an improvement. However, the certificates it issues can be phased in independently of the exchanges of certificates from the importation of exempted goods.

Each country, then would be in the position of merely exempting any goods it found critical. It would scale back exchange rates in other goods to a less than 1 to 1 ratio, and fill in the difference with the certificates it had earned in importing the exempted good.

Debt, Total Debt and by Sector

Today we're just going on a little about debt, so you get the picture(s). These are all taken from FRED graphs, the St. Louis Federal Reserve's data manipulation and display feature, which apparently anybody can register for and log on to. And with a little practice you can get the graphs I have here. They are a little small, but at FRED http://research.stlouisfed.org/fred2/
you can make them into PDF files and any size you want. The first is total debt for everyone in the US, everyone being, roughly:

GFDEBTN/1000 Total debt of the US federal government, divided by 1000 because the original graph is presented in millions, and for some reason just doesn't convert if you naively add graphs together.
HSTCMDODNS Total Household debt of all kinds, I think.
SLGSDODNS Total debt for State and Local Governments.
TBSDODNS Total debt for non-financial businesses.
DODFS Total debt for financial sector.

It's at roughly $55 Trillion and holding steady, more or less, these past three years. For the 45 previous years it was pretty much growing at an exponential rate. Interesting. See my previous discussions on money and debt eg:
http://anamecon.blogspot.com/2010/11/banks-are-forcing-debt-on-rest-of-us.html

Here is the debt decomposed into the five sectors: First, state and local government debt is seen to be relatively small potatoes. After that everybody else is pretty much still in the race. These last three years, financial has deleveraged a lot, households a little, and business has held steady. Federal govt. debt, however, has accelerated, which seems to imply that, (as others have noticed) the government is going further faster into debt to pay for the financial sector's deleveraging.

Now $55 Trillion is about $180,000 per person, which is also about the per capita capitalization of the United States. That is all the assets in the United states add up to about $55 trillion dollars or so. Maybe slighty less. Anyway, that person at the mean, asset, or wealth, speaking, who is further up the totem pole than the median, (who is half way up the totem pole,) owns nothing. And anybody below him owns less than nothing. Objectively speaking. That is, anybody below that line pays interest, and anybody above that line collects it. Now that mean asset holder is somewhere in the top 5% as far as I can figure, (somewhere between a guess and a calculation.) That is more than 95% of the population each own less than $180,000.
Cf: http://anamecon.blogspot.com/2010/10/what-income-of-top-1-means-to-rest-of.html

Look at the total debt line. It was going exponential. Is still going exponential, if you discount the financial sector and its deleveraging. You're probably wondering how you did it, since, on the average, your own total debt line looks just the same a that one. Because you pay the debt. All of it. Businesses pass on debt to their customers in higher prices. Government, federal state and local pass on debt in the form of higher taxes. The financial sector passes on debt in higher fees, and higher interest rates. So the bottom line is not just your bottom line. All sector's debt weighs on the consumer, and that is you. And it takes many forms, not just higher prices and taxes. It's also higher unemployment, higher underemployment, and fewer government services, and less services from businesses. More foreclosures and decaying infrastructure. All so that a few percent can collect their unjust profits, and live in the style to which they are becoming accustomed to.

Import (Trade) Certificates: Some Problems and Solutions

Import (Trade) Certificates: Some Problems and Solutions

In our previous post, we suggested import certificates as a solution to the European debt problem.

While the idea of import certificates seems attractive, there are details that may have to be worked out. Here are several possible problems, with some solutions.

Consider the market, say, for 1-1 import certificates, certificates giving the right to import $1 worth of goods or services for every $1 worth exported. although it could be any ratio. Suppose the markets for goods were such that anything imported by the issuing country could be sold. If the certificates were perpetual, holders would tend to hold on to them, waiting for the highest price a foreign producer would be willing to pay, which could be quite high. Imports, then, would be below a level which was advantageous to the importing country. Certificates might tend to accumulate, until there was a sell off, leading to a boom-bust cycle of importation.

Suppose instead they had expiration dates, like options. 90 days, 6 months, 1 year. Then there might be a chronic shortage of imports. Or, instead of expiring, they could revert to the government, which could auction them off.

Or the certificates, instead of going to the exporter, could simply be retained by the government, which then sold them at auction. Howard Richman in

http://seekingalpha.com/article/203422-how-import-certificates-could-balance-trade-and-budget

recommends this, as well as targeting the certificates at those countries which exhibit mercantilist practices against the US. If they were targeted at any country which persisted in having a surplus with the US, they would be just as effective as untargeted ones. Attempts to route trade trough other countries would bring these countries to surplus, and then trade certificates could be issued against those countries, too.

Richman, in his article, also discusses the legal implications with respect to WTO agreements. The fact is, the adoption of import certificates would spread, and render those agreements redundant. (We should also expect resistance from the WTO, since they would be rendered redundant.) Since the universal adoption of import certificates would result in all nations having a balanced trade budget, discussions instead would revolve around bilateral differences in allocation, if temporary imbalances were seen as beneficial to one country or another, eg, to capitalize an export industry in one of the countries.

They might constitute a barrier to growth of trade, since any country with an increase in imports, need not be assured a corresponding increase in market. But under these circumstances, exporters to a particular country could be issued import certificates targeted to that country. That country would then be assured an increase in market, and so would not be discouraged from increasing its imports. It could exchange these rights with other countries, for import certificates from them. And this brings us to another option. The import certificates could be sold along side the exports of goods or services. Thus the foreign importer would acquire the right to export to that country, to sell as he chose. There would thus be no barrier to expanding trade, since each country, on expanding imports, would be assured of the rights to a market for its own exports. It would not be assured of the market itself, of course, as there might not be one there for what it produces. However, the country is better off than before, because it has rights to a market that someone might produce for, and it can exchange these rights to a market for what it produces.

At the level of producers, this might get very complicated. So, the import certificates follow the exports to the importing country, whose government acquires the rights. Then the problem of the allocation of rights to producers becomes a domestic one for each country. (This would in fact be the default situation, since any government could just tax the certificates away from its importers.) Each country’s own government would be the clear cause of any woes resulting from trade.

The whole thing seems to take on an aspect of barter. Countries have rights to markets they might not want, looking for someone with rights to markets they do want, who might not want the rights to the markets they do have. But in fact there is already a market for much the same thing, and that is the currency exchange market.

What could go wrong? Well, a country with substantial debt is eventually going to want to issue import certificates to a value less than its exports. In this way it can pay off its debt. That means its going to have to trade with countries which issue it certificates to value more than its exports. Its debt holding partners have to allow themselves to be repaid. See the example below.

A country wanting to indulge in mercantilist practice is also going to want to value the certificates it issues at less than a dollar for each dollar exported. Were all countries to engage in this practice, or even enough countries to engage in this practice, world trade, and the world economy, would contract. What would be good for one, would be bad for all. But how would one discourage individual perpetrators? The desire to expand one’s economy, at the expense of others, should not be rewarded, nor allowed to wreak havoc with the world’s economy. Now a valuation of its import certificates at less than the value of its exports, would be a clear signal of mercantilism. It would be anti-social behavior, though not aimed at anyone. But of course, it would be aimed at each country in its particular, since it is to each country that it is issuing its certificates to. That is, it would be saying to each country that it wishes to take advantage of it, to exploit its trade to grow at that country’s expense, by forcing a trade deficit on that country in particular.

Each country would be taking it ‘personally,’ and have the individual choice: To allow itself to be exploited, or to retaliate against the mercantilist country, say by issuing trade certificates against that country which were similarly valued at less than the value of the export.

Actually, retaliation would not be necessary. Suppose country A is issuing import certificates at a 1 to 1 value, one dollar of import certificates with each dollar of exports. Then any country B which issued certificates against country A of, say, $.90 per dollar exported to country A, would automatically see its trade with country A contract. That is because at the next round of trade, country A would only be able to export $.90 worth of goods to country B, and thus country B would only receive certificates to export $.90 worth of goods to country A. The next round country A would only be able to export $.81 worth of goods to country B, and that is all the certificates country B would receive. And so on.

In order for trade to maintain at the same level, country A would have to issue certificates to the value of $1.11 per dollar worth of goods exported. Then when country A exported $1 worth of goods to country B, Country B would return with $1.11 worth of goods, and the right for country A to export another $1 (90% of $1.11) worth of goods. So the situation would remain stable. Country A would actively have to allow itself to be exploited. It would have to cooperate in going into debt.

So, what is the import certificate that we are now talking about?

It is issued by each government. It is a right to import a specific quantity of goods or services into the country of that government. It is issued. for one of that country’s exporters, (perhaps to that exporter,) and it goes along with the export to the government of the country of destination. That government, depending on its domestic policies, may do with the certificate as it wishes. It may be allocated. It may be auctioned. It may be bought, sold, or exchanged.

It is 1 to 1, the right to $1 of import for each dollar of export, (eventually, in the case of debtor and creditor nations.)

We have discussed some of the alternatives, and the problems attendant on each. Some country A may issue them domestically. But that does not give any incentive to country B to import from country A. Not only does country A giving the certificate to country B give country B the right to trade with country A, but the incentive to do so, since it assures the rights to a market for its own producers. This type of import certificate constitutes a reward from country A to county B for buying from country A. How could country B complain?

Trade Certificates: Solution to the European Debt Crisis

Trade Certificates: Solution to European Debt Crisis

Here’s a nice discussion of the European debt crisis:

http://streetlightblog.blogspot.com/2011/09/estimating-cost-of-eurozone-crisis.html

It’s the third of three articles on the thing, so click on the blog title to access the rest.

We reduce it to the producer-consumer problem. See:http://anamecon.blogspot.com/2010/05/greek-debt-and-producer-consumer.html

But Kash describes the crisis per se is a result of the sudden cessation of capital flows from the center of the Eurozone to the periphery. These flows had to cease, and probably suddenly, some time, as the debt imbalance inevitably piled up. Kash also notes a fair percentage of those flows were for investment. The periphery countries weren’t exactly squandering the money, but that really doesn't matter, except to make the tragedy more poignant. He suggests shared responsibility for the crisis. Yes, the central countries have to pay. Actually, have already paid, they just have to swallow their losses. Making the peripherals pay is just going to make them less able to consume German surplus production. In fact, the peripherals have to achieve a trade surplus. Germany will have to find other markets for its surplus. Inflicting pain on the periphery, except to the point where they have to live within their means, is graceless. Of course, the entire process of- inflicting surplus production on them has reduced their ability to do this. The same thing has happened to the US with its trade deficit. Its ability to live within its means, actually the means itself, its industry, has been compromised.

Now Greece borrowed a lot of foreign money. That money had to be, eventually, spent on foreign goods. Or else they would still have it, in cash, and be able to give it back. We observe that debt, if you don't have the cash, must be ultimately be payed with goods, services, or assets. Nothing else will do.

So what is to be done? Austerity works for households. For nations? You might think. But the problem is deflating a nation's economy destroys productive components while it is reducing consuming elements. Indeed, the productive elements need the consuming elements to continue consuming unless they have compensating export opportunities. For it is only by exporting that the deficit country can pay back the debt, but will the surplus countries allow this to happen? Or instead is the deficit country is forced to sell assets, which worsens its ability to pay in the future?

In fact, the entire process, in the absence of any debt forgiveness, has a dubious- morality. The surplus country lowers prices, drives businesses in the deficit country out of business. See:

http://anamecon.blogspot.com/2010/04/effects-of-unbalanced-trade.html

Runs up the debt in the deficit country, then buys up the deficit country's assets. Moral? Or a form of war?

Greece, for instance, had a significantly deteriorating trade balance since about 1990. It seems to be a self-reinforcing thing. And now its assets are being sold. Germany's trade surplus has been increasing steadily since 1990. Is it buying Greek assets?

We recommend the introduction of import certificates, to force a balance of trade, and pay off reasonable debt. See: http://seekingalpha.com/article/203422-how-import-certificates-could-balance-trade-and-budget

Or for a brief description on import certificates, see: http://en.wikipedia.org/wiki/Import_Certificates

Rather than the targeted certificates, we merely encourage all deficit countries to phase in general certificates, not aimed at any country. Indeed, once the process starts, certificate trading will quickly become the norm, since deficits will be forced and focused on those deficit countries which do not practice it, and trade wars will ensue between surplus countries.

Better than selling the farm. Certificates could be phased in, to prevent economic trauma. The goal would be exporters would be issued 1 euro worth of import certificates for each euro they exported. This certificate would allow the importation of 1 euro worth of goods or services. These certificates could be bought and sold. For the deficit country, these could be phased in, starting near the percentage of deficit. Thus, for a country with a 30% trade deficit, they could be originally issued at 1.25 euro worth of imports allowed, say, for each euro worth of export, and then reduced in periodic increments until one euro of import per euro worth of export, at which point trade would be balanced. In fact, if this were practiced by Greece, eventually their trade and capital flows would each be balanced. Problem solved. To pay back what is already owed, eventually Greece must have a trade surplus, so it would, for a while be issuing certificates allowing say .9 euros of imports for every euro worth of exports. This would force it to have a 10% trade surplus, with which to pay back its debts. It also implies that they willl be consuming at less than their production, which is the point of the austerity process. Of course, the process would take longer than any interest on the loans Greece presently owes to compound to unpayable heights. Do the Germans have any intention of allowing Greece to pay them back, since this would damage their own economy? Or are they instead after Greek assets?

But Greece can be the master of its own fate, if it so chooses. With a little help. And so can the US.

And the peoples of the Germanys and Chinas of the world will have to consume to their ability to produce.

Meanwhile, with each country issuing trading certificates, international trade wold be balanced on a nation by nation basis. No country could be claimed to exploit its surplus to cripple the economy of another, and expand its own economy at the other country's expense. All countries would have to live with in their means. And the benefits of otherwise free trade could be enjoyed at a maximum sustainable amount.