Who do you owe?

There is much ado about debt, these days. The debt. Like it is owed to space aliens or something. It's not. It's some people 'owing' to other people. Lots of 'owing,' these days, which is why it is a 'problem.' This owing is kept track of in something called money, so it's some people owing lots of money to other people. The probelm is made worse by soemthing called 'interest,' which is the arrangement where, if you owe money for any length of time, then you owe more money. So if you owe money, and you don't pay it back, you owe more money, and MORE money, and MORE MONEY and, and...

Well, we'll get into that some other time. First, we ask the questions. And the first question we ask is, who owes what to whom? Which is really three questions, so let's first ask who is the money owed to. There are numerous possibilities. We can eliminate space aliens. We can also eliminate the poor. If they were owed the money, they would be rich. How about the middle class? No, they seem to be drowning in debt. How about our government. But we all know it's up to its ears in debt. Of course, there are also rich governments, who seem to be owed a lot of money. But that much? No.

So who does that leave us? Hmm? The rich. But we've got to be talking the really rich. Even the median of the top quintile, for which I have data (2004) owes $167K, though net worth of $318K. The really rich seem to be owed all that money.

And we've also answered the question of who owes. The poor, the middle class, and the government.

But what do they owe? Lots of money. Debt to GDP is at about 380%, of which 290% is
privately owed. So GDP ~$14T x 3.8 = $53T/300M people = $177K per capita, as of 2008. $354K per worker. Now $42K per capita of that is the public debt, so $354K - $84K = $270K per worker is the private debt. Now the interest on the public debt is (now) 0%, sort of, and let's figure the interest on the private debt to average out to 6%, which is probably low, since AAA bonds are yielding a little over 5% interest. So $16.2K in interest. $16,200. Interest per worker. That's all going where? The company store? Sixteen tons?

Take a step back: 6% on 290% of the GDP means $2.44T or 17% of the GDP goes to interest payments, aka debt service. Non wonder demand is somewhat contracted. And the interest on the US debt is not really 0%, so we probably should add a percent or two.

Just by the way $53T is slightly more than the value of all the assets in the US.

Now of course, this isn't owed one person to another, this is all owed to banks. $16.2K to the banks. But apparently many banks aren't doing all that well, so who do the banks owe? Well, they 'owe' their owners, they owe their bondholders, and they owe their depositors. Now their depositors aren't getting much in the way of interest. So all the interest must be going to the bondholders, and the owners. But if the banks are still in trouble, that means it must be the bondholeres who are getting all the money. Owners are just making up their losses, recapitalizing their balance sheets. (Are they? And who does own the banks?) Bondholders must just love this deflation we're having.

Well, we've spun our wheels a little bit here, and it's hard to find out who owns what. But if you own a lot, you're probably owed a lot. And you're rich.

So if you owe, you owe probably owe the rich. Or maybe some pension fund. Another possibility, among others.

The Interests of the Wealthy

When the wealthy seize control of government, the wealthy cannot help but destroy the society which supports them.

In the short term, it is in the separate interests of the wealthy to corrupt the system to their benefit. That is, they will seek their own benefits ahead of the people's, first by becoming the instruments of government policy, then by bending government policy to their interests. They will cooperate with each other to do this, and secure advantage over the people. Securing advantage, they will plunder the wealth of the people. This is what (most of) the national debt is. It is what the people 'owe' the rich. Instead of paying taxes, wealthy 'loan' the money to the government, which it then has to pay back. The wealthy have used their power to cause this.

In securing their separate interests, they will cooperate in gaining favors. They will trade for votes. This is not 'zero sum' as regular trade is, but each party gains, and both their influence on, and burden on, government and the people, will expand. That is, through the instrument of government, they each acquire disproportionate wealth. And since all resources are competed for, others, the people, are at a disadvantage. The system becomes rigged.

But then they will compete, they must compete, to secure advantage over each other, and further advantage over the people. The government becomes an instrument of their competition, as they compete for its favors. Those who do not compete will be at a competitive disadvantage.

So all the wealthy are forced to compete against each other. They will compete to cause the government to pursue purposes to their own separate ends,which is the very definition of corruption. These interests, the benefit of the wealthy, harm the system, and the people, necessarily, by the law of externality: Those costs which can be externalized, will be. Thus the costs of the benefits to the wealthy will be laid upon the people, until the wealth f the people is exhausted. We are seeing this happening in the present 'recession.'

But the welfare of the people is essential to the welfare of the wealthy, and where it is destroyed, so is their own welfare. If the destroy the income flow of the people, they destroy their own income flow as well.

A poor society has few rich people. Neither has it much power to project, or even protect its interests.

In the long term, an uncorrupted government serves the interests of the wealthy better. A government can only remain uncorrupted to such degree as the influence of the wealthy is limited.

The people have been losing the competition for their government. They have persistently elected the servants of the rich to office. Now the system is rigged in the favor of the wealthy. Not good.

Cross posted as comment to angrybearblog.com: Maule and Pappas on progressive taxation and the decreasing burden on the rich

The Greek Problem Again

Well, it's 12 days since my post on the Greek Debt. Euro 440B from the eurozone, euro 60B from the European Commission, and euro 250B from the International Monetary Fund. Never let it be said the IMF doesn't take care of its own. Plus the US and other countries are going to guarantee dollars. Couldn't find out how much.

So that's a lot of money. But it is all loans, and the fans are not impressed. A The markets seem to think that this is just pushing the problem down the road. And it is. Germany doesn't want to bite the bullet and let Greece, and the other countries it has a current accounts surplus with, off the hook. But it will let the bankers and other speculators off, and put the European taxpayers on instead. We are talking about a massive transfer of wealth here. And the problem: Still the producer-consumer problem. The only way out is to give the Greeks, and the other PIIGS for that matter, back their money, so they can spend it on German goods again, and keep those factories in the Ruhr humming. So, with the people of the European Union somewhat poorer from the experience, they can all go back to work. Will they be wiser?

Meanwhile, a trillion dollar contribution to sovereign debt. The wise banker should be shaking in his shoes, because bankers the world over are going to succeed beyond their wildest dreams. If things play out.. wrong, and this is a giant step in that direction, they're going to end up with all the money! What a happy day that will be for them!

All our banker has to do is give it away. But, like the monkey with his hand in the jar, he won't let go of the banana. And if the monkey won't let go of the banana, he can't get his hand out of the jar. So he's stuck there.

Clues you in to how smart our masters are. Unfortunately running a monetary system requires a little more intellect, and a lot more balls, and pandering to the powers isn't going to do it.

Greek Debt and the Producer-Consumer Problem

Well, I just looked it up and the Greek debt stands at euro 298 billion. Mostly goods. Mostly EU. (It joined the EU in 2001.) The EU is going to bail out Greece to the tune of euro 110 billion. Last I heard. As a loan. Basically this is really bailing out the people who loaned Greece money.

This will not solve the problem.

I figure the best thing for the EU to do is just give the money to the Greeks, and then they can go back to playing the same game. Give the Greeks back their money, so they can go back to spending it on imports from Germany, and the Germans can go back to making exports for Greece. Otherwise the interest on the loan is just going to come due, Greece won't be able to pay up, it will stop importing and put a little crimp in the German economy. And then the other little PIIGS come to market.

Another way to put this is just have Greece default on its debts.

The only other option is for Germany to buy up Greece. Which still won't solve the long range problem, which is maintaining Greece as a market for German goods.

Which is the general producer-consumer problem. No matter how much money the consumer starts with, eventually the producer ends up with all the money. Then the producer either has to give the money back to the consumer, stop producing, 'loan' the consumer the money, or buy the the consumer's assets. Buying the consumer's assets is just another step in the process, and doesn't work in the long run because eventually the producer will still end up with all the money. And the assets. And this chokes off demand. Loaning the money to the consumers doesn't solve the problem, because the loan compounds, and eventually the costs of servicing it chokes off demand. Only by giving back the money is demand maintained.

The only way for the game to continue is for the producer to work out a way to give the money back to the consumer. Otherwise the game comes to a stop. Chaos ensues. Anarchy. The death of millions, etc.

This is the general instability of the market system. This is important. Pay attention. This is the general instability of the market system. Especially under free trade, (ie a 'free' market.) And not just between countries, but between any organized entities, or any individuals. If any individual works just the slightest bit more than another, and there is free trade (exchange) between them, either the harder working individual trades down, that is accepts less that par value for what the other has to offer, and allows the other to trade up, or he eventually ends up with all the other's assets. The other ends up with no assets, and the harder worker ends up with it all.

And as between two, so between three or four or a million. The hardest worker(s) eventually end up with it all. And this might be called the most just result. Of course, it doesn't have to be the hardest worker. It could be the cleverest, or the luckiest. Or the one with the most leverage.

Because the producers don't necessarily end up with all the money. There is another class, whom we will call manipulators. The manipulators do not produce anything, but they control the money, and because they control the money, they can arrange it so that they themselves are the most efficient accumulators of money. More so even than the producers. So they are the ones who end up with all the money. And the assets.

And default will be prevented, the debts assumed by the people, so as not to offend the sensibilities of the manipulators.

Many libertarians go on about: "What ever arises from a just situation by just steps is itself just." (Nozick) Well, the end result of this 'justice' is the impoverishment of most of society, and ownership of everything in the hands of a very few. (Actually one, in the limit.) And not even those most 'deserving,' not even those who most contribute to the wealth of society, but the most skilled at manipulating. Horrorshow.

The generalization is mine, I think. The particular with reference to free trade, is: "Mathematical modeling reveals that under these conditions, outright Las Vegas decadence is not necessary for there to be a problem. It reveals that with free trade between nations with merely different discounts on consumption, the nation with the higher discount (more impatient) will tend to maximize present consumption by having past generations (who produced the assets that can be sold off) or future generations (who will service the debt) pay for present consumption. Various factors can interfere, but that's the underlying dynamic." Ian Fletcher, 'Free Trade Doesn't Work What Should Replace it and Why.' (p47) He includes this reference to Joseph Stiglitz: 'Factor Price Equalization in a Dynamic Economy,' Journal of Political Economy May/June 1970.

How Not to Counter the Trade Deficit Redux

We have the identity: (I - S) + (G - T) + (X - M) has to equal zero. Investment - Savings + Government Expenditures - Taxes + EXports - IMports is equal to zero. So if (X - M) is seriously negative, (G - T) has to be seriously positive for there to be any net investment in the private sector. (Unless there is dissaving. The national Savings rate is now about equal to zero.) The government has to run a deficit, and it has to be larger than the trade deficit. Current trade deficit is about 5% GDP, so for investment to run 3% above private savings, the government has to run a deficit of about 8% GDP. Savings are future inflationary, since they represent consumption in the future, so you want investment to out pace savings. $1.2 Trillion deficit then is what the government should be running now. So only with a significant trade surplus can you allow government to run a surplus.

Can't run up debt, though. That would outstrip GDP growth. So you have to 'print' it. Would be inflationary but the extra goes to foreign countries, who can't get rid of it very easily. They have to spend it. Here. It would be like they had it in a savings account, if they buy bonds. Or like a checking account if they hold onto the cash. So one of the purposes (the purpose?) of selling bonds is to keep the money out of circulation, until the bond matures.

So, with deflationary pressure from the trade deficit uncompensated for because of inadequate government deficits a good investment strategy would be to short US industry. If you were a ...what? Traitor? How is investing betting of the failure of your neighbor? Or your own failure, for that matter. But the losing strategy results from the government inadequacy of spending.

Still not a very good way of compensating for the trade deficit, though.

On Rights

These truths are self-evident:

All rights are the creation of men. It is the desire of men to have rights, which creates rights. Rights derive from the relations between men, and the resources available to men. Men give rights, so that they may have them. They are property, which each man possesses to one degree or another. Rights have value. The value of a right is not its formality, but its effect. Each man values each right, to one degree or another, according to its effect on his life.

All rights are by the consent of others. Since the consent of others is always contingent, no right can be absolute or inalienable.

Each society has available to it, even where it extracts rights from other societies, only so many rights to distribute among its members. A society with more resources has the potential for more rights. It may have less.

Each right that a person has is a limitation on the rights of others. Each right is a burden on others.

Rights incur responsibilities. The failure to meet those responsibilities is a cause tor the alienation of those rights. The first responsibility is the granting of rights to others. The second responsibility is their enforcement. The third responsibility is mercy. Since the responsibility of rights represents a burden, the fourth responsibility is the minimization of that burden, given the maximization of those rights, given the resources available. The fifth responsibility is the education to those rights, and their responsibilities, and their burden.

The people of a society grant rights for their own benefit. Rights are granted where the effective benefit of those rights is greater than the real burden of the responsibilities. Where the people benefit less than the burden, those rights will be discarded.

The people of a society develop institutions for securing their rights. These institutions formalize the granting of rights, and their enforcement. These institutions are themselves granted rights, to the benefit of and at the expense of the people. Such institutions necessarily also increase the rights of a few. To such degree as they use force, or are inefficient, they reduce the rights available to the people and increase the burden of those rights.

In a society, there is a natural distribution of rights, which depends on the resources available to that society, demanding the least force and incurring the least inefficiency, which maximizes the value of rights available to the people. The institutions chosen by the people need not guarantee that distribution, and indeed may be chosen to impose distributions of rights different from this natural distribution. The additional expense, the loss of rights to a society, will be more than proportional to the deviation from the natural distribution.

So by consent, the members of a society may make certain rights universal, and held in equal quantity by all, and inalienable except for failure to meet the incurred responsibilities. These certain rights then represent a form of property which cannot be bought or sold. A society may consent to this, at the expense of other rights, that the few more fortunate of more able, shall not otherwise acquire those certain rights of the many less fortunate or less able.

And by consent a society may make certain rights held by a few, who incur greater responsibilities. It may assign these rights, and those responsibilities, to the few, in
various manners. These certain rights then represent a form of property, which may also be bought and sold. A society may consent to this, at the expense of other rights, if the many choose to not effectively exercise themselves those responsibilities these rights incur.

Properties are rights, and by the consent of others. Therefore, no property is absolute or inalienable. Others consent to properties, so that they may also have properties. Those who consent to have less, do so in the expectation that they may attain more, either in the present, or in the future. Since properties are rights, those with more properties have more rights than those who have fewer. Those with more properties also impose greater burdens on their society, and incur greater responsibilities. Since there is a natural distribution, those with more properties may impose a disproportionately large burden of their society, and incur disproportionately greater responsibilities.

There will always be those with many rights. There will always be those with few. When those with few are many, and those with many few, a society is poor.

Where many rights are narrowly held, where the many have few, either the few exercise their responsibilities, and impose the lesser burden on society, or they impose the greater burden of society, and the consent of the many is obtained and maintained through fraud and excess force. The many may either shake off their burden, or succumb to it. The resources taken to enforce fraud and excess force take away from the rights available to society.

That distribution of rights which maximizes the value of rights, and minimizes fraud and force, is most just, and most merciful.

Subject to revision.

On how not to counter the trade deficit

The thrust of our previous post was that mercantilist policies work, promoting economic expansion in the country running the export surplus, to the enormous detriment of the industry of the country running the trade deficit. This involves the exporting nation acquiring a surplus of the importing country’s money. The rosy idea that the system of free trade cannot be exploited to one country’s advantage is, on the face of it, absurd. No economic system has ever been developed which has not been abused. History has shown, those countries which adopt an export oriented posture prosper, those that do not decline. One may ask, why did the European powers prosper, while their colonies remained stagnant or declined?(They still practice it, in the form of foreign aid.) How did the Asian Tigers arise? Why does China prosper, while the US declines? Why is Germany tasked with ‘rescuing’ Greece? The answer is always the same. One country runs a trade surplus, while the other runs a deficit.

Warren Mosler, at
http://moslereconomics.com/2010/04/12/my-alternative-proposal-on-trade-with-china/
suggests, however, that we counter China’s policies simply by giving money to consumers sufficient to overcome its effects, and create sufficient demand to sustain domestic industry, as well as the excess in imports. He proposes a tax holiday, distribution of Federal money to the states, and national service employment.

His proposals have other significant merits. However, his proposals will not change the relationship between the Aggregate Supply curve provided by domestic industries, and the augmented Aggregate Supply curve provided by the combination of domestic industries and imports. The augmented Aggregate Supply curve will always be to the right, and the equilibrium price level will always be less than the price level in the absence of imports.
The revenue received by domestic industry will thus on average, always be less than the cost of its production, despite any overlay of inflation caused by giving money to consumers. Domestic industries will be under persistent competitive disadvantage.

Compare with balanced trade, where only some industries experience competitive disadvantage, but the others experience competitive advantage. The two even out, and the economy as a whole is helped. ( Although there is increased 'creative' destruction, as the economy adjusts. Do the costs of this balance with the benefits of trade? This seems to be just a transition state, however and in the long term balanced free trade will be mutually beneficial.)

An influx of cash shifts the demand curve to the left. The Aggregate Supply curves for just domestic production, or for balanced trade, and domestic production plus imports, do not change. With imports, price moves down the AD curve to the AS curve for domestic production plus imports, at the lower price. Solid lines. However, domestic revenue goes down the Aggregate Supply curve to the new equilibrium point at both the reduced price and a reduced quantity, and so is also reduced. Domestic industry, with reduced revenue, contracts. With an influx of cash, the same phenomenon repeats itself, but just at a higher price level. Dotted lines. But see Redux.

A reminder that might be pointed out is that the problem with deflation is that in general it reduces nominal profits and, at least in perfect competition, nominal costs are greater than nominal revenues.

A comment: The Aggregate Supply curves in this diagram could be vertical, or curved, for those who consider that an influx of cash is itself unlikely to cause an increase in production, but merely cause an inflationary increase in the price level, at least in the long term. The basic argument is the same. The country with deficit clearly declines both in quantity and price, and certainly could produce more at higher price levels, having idled capacity. The country with surplus is continually expanding, and its growing capacity must always outpace production.