Is economy all about money printing?
Is economy all about money printing?
(correspondence between EugenR and pshakkottai about macro economy)
As it appears, monetary policy of quantitative easing, which in practical terms mean printing new money, implemented by the Federal Reserve bank since the economic crisis in the US, and more recently by the ECB in the Eurozone, did not bring economic catastrophes as some predicted. If so why not to do it even in wider range? Why not make our citizens rich by dropping on them US Dollar and Euro bills out of the helicopter?
Of course there are many problems with such a policy.
- The newly printed money is channeled in certain way, and through certain financial institutions. For example if the newly printed money is used to purchase government securities, their price will rise, and this means lower interest rates. Then the monetary investors, mainly pension funds and small investors, who try to preserve the value of their life savings for the hard times are impoverished, while the economically active entrepreneurs, who base their economic activities on credit are enriched. This enlargement of gap of income, we see everywhere. It causes social and political disruptions, but also negatively influences the aggregative demand, since the top rich have limited capacity for demand, so it has deflationary influences too.
- The newly printed money is channeled to the economy through financial institutions, mainly banks, and the top managers of these banks, who use some of this money for their own enrichment, and even worse, to buy political influence. This phenomena even more impoverishes those who are out of the circle of the few on the top. More damaging than this is the monopolization of resources in the economy, that is direct result of concentrated financial power in the hands of view
As example i would bring the mining industry of most of the basic raw material production like oil, ore and even fertilizers concentrated in very few hands. This has negative effect on both, the price level for the users, and the consumers, who are forced to pay higher prices, who are again the masses not connected to the top. But monopolization in the economy is not just in the resources. It is in the financial world too. No one can compete the very few biggest US, European and the Swiss banks, behind them are the three most worldwide used currencies, which are the basis and the point of reference to most of the other currencies in the world.
- Excessive money printing will eventually make the money very abundant. Abundance of some item makes it cheap, (like glass crystal compared to diamond crystal). It means the money necessarily will lose its value. Or in other words the inflation is a necessary outcome of such a policy. Inflation did not occur yet in spite of the policy of quantitative easing of the Federal Reserve, because the banks, following the 2008 meltdown needed to build up reserves to save themselves. Also new International regulatory framework for banks called Basel III, introduced by Basel Committee on Banking Supervision since the economic crisis, forced the banks to squeeze the credit and the borrowings. This era of stabilization of the banking system is coming close to its goals, and probably the monetary squeeze the banks caused will end. All these occurrences will bring probably new instability to the world economy.
- While the monetary policy strongly influences the aggregative demand, it has relatively little direct influence on the aggregative supply. Its direct influence on supply is mainly through the interest rate.
The aggregative supply is more influenced by technological development, and/or by limited resources which can have different nature. The main limited factor in last years has been the negative environmental impact of the economic activity. At first it forced the producers to introduce expensive equipments and cleaning systems into the production processes. Now the new events are more intensive and catastrophic. It is caused more often by natural disasters caused by changes in the world environments. (as example i would use the Fukushima nuclear disaster, even if not caused directly by the human activity, it could have such an immense consequences, because of the concentration of nuclear power plants in one, not very appropriate spot, due to lack of alternative more appropriate locations. All these economic events have limiting influence on the supply side if the economy. Of course these limiting factors are mostly balanced and even overbalanced by the technological developments, but as well known, technologic development is unpredictable, so is its economic, political and social influence.
- What the recent economic history teaches us is that monetary policy on the global scale is able to moderate economic imbalances between the countries, and also on the time scale between the present and the future. But it is doing it through the tool of borrowing from those who accumulate assets in monetary form as savings, to those who accumulate it in physical form as investments in economic assets, be it tangible or intangible assets (knowhow, good will, etc.). Then when the day of repayment comes, and it doesn’t come in a smooth flowing way, but rather in big chunks the whole system tends to collapse. The collapse is not good for those who saved their money, and not to those who borrowed it with a perspective of future income and profits. The only one who can gain from this collapse are the financial sharks, who know how to react to any new financial circumstances, and who are close enough to the events to be the first to react. And as to my opinion their impact on the economy is mostly if not entirely only negative.
Rösler’s crowing aside, the Germany is building on the flesh and blood of its neighbors and its citizens. In a brilliant campaign, reminiscent of the American .1% income group’s campaign to impoverish the U.S. middle- and lower classes, Germany has convinced the world its success is based on “budget consolidation” and “solid finances.”
A growing Gross Domestic Product requires a growing supply of money. In the case of Monetarily Sovereign nations, like the U.S., Canada, China, Australia etc., that money can be created ad hoc by their sovereign governments.
But for monetarily non-sovereign nations, which have no sovereign currency and so the total supply cannot be increased, each nation must try to steal Euros from the others, in a nationalistic riot of mutual cannibalism.
When the other euro nations finally surrender to the eventuality that they either return to Monetary Sovereignty and re-adopt their own currency, or merge into a financial version of a United States of Europe, Germany will run out of blood donors.
At that point, German citizens will begin to suffer so much they will seek out a strong, ruthless leader, who will identify and persecute scapegoats, then renounce the euro, so as to finance a war, just like the one Hitler did.
During the chaos, the German uber-reich will feed off the dying German populace, as salaries are diverted to taxes and the focus turns to saving the government. Soon there will be but two classes: The very wealthy and the very poor. The gap will be complete.”
From Mitchell predicted two years ago, in
It is best to make up Greece’s debt and think of becoming like USA, a UNE for United Nations of Europe, and establish a European Central Bank to finance all Europe and create Euros under federal control. Get rid of all private banks. prosperity will follow promptly.
Hopefully your prediction of future will not be fulfilled. As to United States of Europe I am more than for. But this means also one federal budget, one taxation, one planned deficit, and finally one Eurobonds. Europe unfortunately is still very far from it. If it happens this also would mean that Greece can’t continue with its irresponsible budget and taxation policy. If I understand correctly the German position to Greece this is exactly what they actually wanted to achieve, by squeezing the Greeks. So actually German economic policy is more for United Europe than Greeks. Now that the Greeks finally understood that they can’t be in and out in Euro Zone at the same time, they will have to give up another inch of their sovereignty, and so will have to do all the others. So at end of the day, the Greek tragedy became a good lesson to those, who planned just to take from the reservoir and nothing to add to it. If EU and mainly Germany has any moral obligation to any country, so those would be the Eastern European countries, including Ukraine and Belarus, that as consequence to WWII suffered additional 40 repression from USSR, an indirect result of WWII, and economically are still far behind the rest of Europe. Until now they hardly enjoyed the wellbeing created in EU.
Greece will have to return to its right size, what it represent as real economy (without borrowings). If in the future the new young Greek generation will be maybe more capable and productive than their fathers. Then they will get back the lost paradise, and hopefully it will be a real paradise and not a fatamorgana.
Historically, GDP increases with deficit by an incremental slope between +8 and +3 but in recent times (near 2008) it is actually negative showing something is seriously wrong. I interpret is wasted money for gambling etc.
As I read more and more your economic views, I come to the conclusion, that when we speak about economy on national level, you and me, we look on economics from entirely opposite point of view. You see economy as flow and accumulation of money, and I see it as flow and accumulation of products. To you national wealth is aggregative accumulated money, to me it is aggregative accumulation of products.
If you look at economics of an individual, his economic activity, be it production, consumption or savings, copies almost entirely exchange of money. But on national level it is not so. If an individual’s monetary savings was translated by someone else to economic activity, mainly investment product, but sometimes just by using borrowed money to immediate consumption, money will represent one to one this economic activity. Since it is easier to calculate the money volume value than the product volume value, (theoretically it could be calculated with a different measurement scale than money) the economic activity is usually represented in form of money. From here comes National income (in terms of money)=National product (in terms of products). Still it doesn’t mean that money is the real economic value created.
To prevent double calculation, you will never use in measurement of GDP other tool than money. The result of this is that economic activity, without money exchange, will not be calculated as part of GDP. It also means that when in an economy nothing else changes except decrease of product price, the GDP of such an economy will decrease too, even if the level of wealth has not changed (actually this is what is happening in last years in Japan). Of course there are tools to calculate annual change of GDP in real economic terms, where the price change is neutralized, but in absolute terms the GDP was changed just because of price change of the product. The absurdity of such an accounting system is that when the prices drop due to development of technology, the GDP drops too. Luckily the new technologies create also new paradigm changing products, like mobile then smart phones, or new communication systems, that will add to the national accounting new values. Take for example electricity versus phone companies. 20 years ago, these two business activities couldn’t be compared as to volume they represented in the GDP. If you can recollect, your personal bills to phone companies compared to electricity companies, you will immediately see the huge change in proportions of this two items in your bills, but also in your life. And this did not happened because you reduced your electricity consumption, in contrary, it grew in absolute terms too.
“The conclusion;, at the end of the party the bill has to be paid. How the USA will pay its bill for 35 years of public deficit and reduced private savings? Probably by inflation or currency depreciation or both, or if we are lucky with some NewApple company shares or pieces of real estate.”
No. Deficit has become wealth at the end of 35 years. Red area = Blue area +or – green area.
Created money + labor+ materials + talent = real material wealth. Money is only a “token for the ride”!
I agree, the U.S. public deficit with low saving rates creates huge US debts to foreigners. This is balanced by selling green papers ($) all over the world, but also US assets. If those assets were newly created it is ok. But if not at the end US economy will be run by the foreigners. But let’s not forget, that US is a magnet to the world wealthiest people and also the most talented ones. So to predict what will really happen to it’s economy is quite pretentious.
The same balance applies to poor India, also a monetary sovereign. Again India’s wealth is the sum of its ( fiscal deficit- trade deficit) with the miserable exchange rate $1 = Rs 60. Whether foreigners will own much of Indian economy remains to be seen.
The full equation for a monetary sovereign is: FISCAL DEFICIT – TRADE DEFICIT = PRIVATE SAVINGS – PRIVATE INVESTMENTS = NET PRIVATE SAVINGS and data shows this equality in
See the symmetry of this plot. At low trade government deficit in red plotted positive downward is equal to private saving in blue positive upward. Trade modifies this as indicated in green, the balance as in the equation above.
USA data does not show much inflation. As long as labor is available, inflation is believed not to occur. So money can be created for all public purposes till labor shortage is incipient. At that point interest rates can be increased or reduce the creation of money.
To my understanding:
- private saving – fiscal deficit=net savings. Net savings + net borrowings from foreign source = total investment.
In the US economy net saving is negative, so it is balanced by net borrowings from foreign source. The domestic debt is not significant, since it can be repaid by new taxes, inflation etc. Since the US dollar is used as currency out of US, it can be seen as export item, and then maybe the US borrowings from foreign source are not so bad after all.
- Labor is not the only limiting factor in the production. Some raw material can be also, or lack of entrepreneurship, etc. So connecting money supply only to labor can be sometime mistake, like it happened in seventies and eighties, and then you have stagflation.
In the equality as expressed above, taxes and borrowings are absent. Bank transactions net to zero because one man’s loan is another’s saving (except for interest). Only the fiscal deficit counts as income to the macro economy and eventually contributes to wealth. The source for wealth is (FISCAL DEFICIT – TRADE DEFICIT) and not federal taxes and bank borrowings. If they were involved the symmetry of the plot would be less precise!
Fiscal deficit=total government expenses-total taxes. So fiscal deficit includes taxes. Fiscal deficit-trade deficit=total net newly printed money in the domestic market. I am not sure what it means, since money is more created by the commercial banks due to multiply borrowings, than by government. I am not sure if money on national level has much to do with real wealth, maybe with the illusion of wealth. Real national wealth are assets that have potential to create new wealth or economic value of consumption. It doesn’t have to be tangible asset, it can be also education level of population, health, know how, entrepreneurship etc.
Deficit=government spending – government tax = Fiscal deficit = created money, involves taxes incidentally but what counts is ONLY created money. Taxes can be zeroed out and the economy will run fine. Taxes are entirely unnecessary to fund anything. Government deficits are supposed to fund public investments like education , infrastructure, healthcare which contribute to wealth of a better informed talented citizenry. Taxing is only required to control inequality which is bad for democracy. Taxes remove money from the economy which is bad.
Newly created money not necessarily creates new wealth. If wealth creation is blocked by some obstacle, like monopolies, social disruption, white elephant projects, lack of entrepreneurship, lack of needed professional force, I can continue to write all the obstacles that my stop wealth creation and never get all of them. The capacity to print new money on the other hand is easy and unlimited. So do not fall into the illusion that it is enough to print unlimited amounts of money and the wealth will come by itself.
1) Whole your model speaks about Cash flow and “Public Deficit=Private Savings”, what about the balance sheet? The depletion of the asset value, caused by wrong investments?
2) What if the private savings is external of your currency region. The government may lose its independence to regulate trade deficit.
3) To much “deficit-savings”, “Reduces the Currency Value=Depreciation of the currency”. It can be visible as inflation and currency depreciation or hidden, as the mountains of government reserves hold by foreign governments. (US government bonds in Chinese + Japanese vaults).
4) US has not only public deficit but also negative private savings. How is it possible according to your model?
There are several options:
- Point 3) above
- US economy creates continuously new asset values, that are commercialized to investors many of them foreign, like new start-ups publicly traded companies. This of course causes huge inequality in the income. This is why has the US economy the biggest inequality in income in the western world and not so much because of the tax system. I would say in contrary, in Europe my be the tax legislation more progressive than in USA, but the tax leakage is so common, (because of the independence of tax collection of each individual country, including Lichtenstein, Cyprus. etc.), that it is hard to speak about progressive tax collection at all.
- The real estate market of USA is continuously creating new values, because of growing population and growing economy. From while to while (lately every 20 years) this market collapses, and erases the private investors asset values, reducing by it the public debt too. Since “Reduced Asset Value= Reduced Liquidity”, due to reduced propensity of the banks to lend money. On the other hand the government can supplement this lack of liquidity by printing money, and that’s what is happening now in USA and gradually in Europe too, under policy called Quantitative Easing.
The conclusion;, at the end of the party the bill has to be paid. How the USA will pay its bill for 35 years of public deficit and reduced private savings? Probably by inflation or currency depreciation or both, or if we are lucky with some New Apple company shares or pieces of real estate.
Is GDP a good measure of economic performance?
Economy is not flow and accumulation of money, but as I see it, it is a flow and accumulation of products. National wealth is aggregative accumulation of products and not of money. Only very few countries, like US, Switzerland, United Kingdom and eventually Euro zone, succeeded to make out of their money a product, supplying security, so countries are ready to exchange against it merchandise or services.
I have to add here my definition of product: “Product is everything created by human activity, that can be consumed or accumulated for future consumption, direct or indirect (indirect; means product still in process or tool for usage to produce another product at present or in future). Product can be for self use or transferred to others. Then the tool used for this transaction of product is money (at least so it is in modern economy).”
I will try to explain this view of mine.
Money is a tool that copies certain parts, even if the most significant part of economy, but not all of it. For example, if someone publishes a new article in her/his blog and teaches or pleases someone, she/he produced a product, and still there will be no exchange of money for it. This part of economy is taking more and more significant part in the modern economy. There is a whole new economic theory explaining this trend by Jeremy Rifkin. Viz link: http://www.thezeromarginalcostsociety.com/
If to look at economics of an individual, his economic activity, be it production, consumption or savings, it copies almost entirely exchange of money. But on national level it is not so. If an individual’s monetary savings was translated by someone else to product, mainly investment product, but sometimes just by using borrowed money to immediate consumption, money will represent one to one this economic activity. Since it is easier to calculate the money volume value than the product volume value, the economic activity is usually represented in form of money. From here comes National income=National product. Still it doesn’t mean that money is the real economic value created.
To prevent double calculation, you will never use in measurement of GDP other tool than money. The result of this is that economic activity, without money exchange, will not be calculated as part of GDP. It also means that when in an economy nothing else changes except decrease of product price, the GDP of such an economy will decrease too, even if the level of wealth has not changed (actually this is what is happening in last years in Japan). Of course there are tools to calculate annual change of GDP in real economic terms, where the price change is neutralized, but in absolute terms the GDP was changed just because of price change of the product. The absurdity of such an accounting system is that when the prices drop due to development of technology, the GDP drops too. Luckily the new technologies create also new paradigm changing products, like mobile phones then smart phones, or new communication systems, that will add to the national accountings new values. Take for example electricity versus phone companies. 20 years ago, these two business activities couldn’t be compared as to their volume share in the GDP. If you can recollect, your personal bills to phone companies compared to electricity companies, you will immediately see the huge change in proportions of this two items in your bills, but also in your life. And this did not happened because you reduced your electricity consumption, in contrary, it grew in absolute terms too. The communication activity grew out of proportion compared to the past. It became a product of different dimension, still much cheaper than before. Who could imagine few years ago, that international phone calls with filming transfer will be possible, and free of charge, through your mobile phone. Even in science fiction movies the speaker had to use phone box for such an operation. I wonder how is this expressed in the GDP account?
GDP=Federal Spending + Non-federal Spending + Net Exports.
This definition counts only the money spent and not the outcome. Sometimes negative outcomes are also counted positive. Like global warming, air and water pollution etc. Damage to the environment is not counted and medical care is counted positive and also air and water cleanup. Law enforcement is another. No money is spent on rehabilitation but more prisons are privatized and show good profits.
USA has had net imports in the last few years which is a bargain for the USA because you are exchanging printed money for useful goods from foreign countries.
The reduced labor required could have been used to reduce work hours and give more vacation to people but no. Unfortunately, plutocracy which controls the government produces less employment and more overwork! Plutocracy also has increased student loans and general misery instead of making education totally free. Less educated people means GDP decrease. This is counted positive because private funding of private student loans is highly profitable. Whether they are educated or not is not figured in the GDP.
Cell phones are a big plus to the economy, however. GDP should include the negative terms which are not counted at present.
Agree!!! Junk produced is also part of the GDP. The capacity of US to exchange green papers for merchandise and services is an amazing fact. But what will happen if the Chinese one day decide to stop the game? This brings instabilities to the world economy. The 2008 economic crisis was a direct consequence of this situation.