Down, down, the cash rate is com­ing down!

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By David Law­son

Click here for excel data: Debt­watchCfESI

The recent stall in Com­mon­wealth Gov­ern­ment Secu­ri­ties on issue will con­tinue to put pres­sure on the Reserve Bank of Aus­tralia to reduce the cash rate. As noted by Glenn Stevens in this weeks Media Release on the June Mon­e­tary Pol­icy Deci­sion:

Long-term inter­est rates faced by highly rated sov­er­eigns, includ­ing Aus­tralia, have fallen to excep­tion­ally low lev­els.’

10-year bond yields aver­aged a decline of 3 basis points per trad­ing day for the month of April. The spread on gov­ern­ment bond yields and the Tar­get rate con­tin­ues to widen.

gbys to target rate

It is crys­tal clear that the force behind the demand from investors is the desire for a safe haven when risky assets are so down­side volatile, but what about the CGSs sup­ply side of the mar­ket? The CGSs mar­ket was increas­ing at an aver­age rate of 3% per month since Sep­tem­ber 2008, but this growth engine has since stalled. In April Com­mon­wealth Secu­ri­ties on issue declined by 4%, in a period of height­ened uncer­tainty and volatil­ity in the global finan­cial mar­kets. This could be seen as the result of a leg­is­la­ture-imposed sup­ply con­straint, given the Aus­tralian Fed­eral government’s debt ceil­ing, as shown in State­ment 7 of the 2012 bud­get:

 CGS on issue sub­ject to the cur­rent leg­isla­tive limit is pro­jected to be below $250 bil­lion at the end of each finan­cial year across the for­ward esti­mates…

At a 3% monthly growth rate, CGSs on issue would have sur­passed the $250 bil­lion ceil­ing last month.

CGSs on issue

With the Aus­tralian Fed­eral Gov­ern­ment approach­ing their credit limit, CGSs are inher­ently feel­ing the pres­sure of scarcity, dri­ving up prices and push­ing yields down. This is giv­ing weight to some­what sub­jec­tive state­ments about fur­ther inter­est rate cuts this year in the press, whereby the RBA will need to con­tinue cut­ting the cash rate to fol­low the trend of gov­ern­ment bond yields.

This ceil­ing is encum­brance on for­eign buy­ers on have brought up large amounts of the CGSs, adding to our offi­cial-net for­eign debt lev­els.

Official - net foreign debt

Which has also played a pri­mary role in over­in­flat­ing of the Aus­tralian dol­lar.

AUD/USD

Nat­u­rally, as inter­est rates fall fol­low­ing bond yields, the Aus­tralian dol­lar will come back to a more real­is­tic val­u­a­tion, and we will soon dis­cover that Aus­tralia is in fact not dif­fer­ent!

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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  • Real inter­est rates in a sim­ple Good­win model are sim­ply the ratio r= (1-u)/u where u is the wage share of out­put, and (1-u) is the invest­ment share. Steve Keen incor­rectly refers to this type of econ­omy as a barter econ­omy, which is a mis­nomer. In fact, the Good­win model describes a cash econ­omy, ie., an econ­omy with­out endoge­nous credit. Adam Smith described such an econ­omy where the tex­tile indus­tries in Birm­ing­ham and Man­ches­ter flour­ished for 100 years with­out endoge­nous credit. Pro­duc­tion was financed through dis­count­ing of Real Bills.

    In a finan­cial­ized econ­omy, with endoge­nous credit, there is an addi­tional share of out­put d which goes to the ser­vic­ing of debt. Anal­o­gous to the real inter­est rate is the nom­i­nal inter­est rate which can be writ­ten i = (1-(u+d))/(u-d). The fig­ure below shows the func­tional rela­tion­ships between inter­est rate vs wage share for var­i­ous lev­els of debt d. The top curve is the real inter­est curve for d = 0 with the lower curves show­ing increas­ing lev­els of d = .05, .1 and .15

    Infla­tion is usu­ally defined in terms of the dif­fer­ence between nom­i­nal inter­est and real inter­est ie., p’/p = i-r . Col­lect­ing terms from the above two equa­tions, a con­cise for­mula for infla­tion can be writ­ten for infla­tion in terms of u and d which is

    p’/p = (d(1-2u))/(u(u-d))

    An inter­est­ing fea­ture of the above curves is that to increase the wage share it is nec­es­sary that nom­i­nal inter­est rates go neg­a­tive.

  • enor­lin

    inter­est­ing” to me implies… unre­al­is­tic 😉
    In this case I think the assump­tion that d can be treated as a con­stant, and inde­pen­dent of u, makes the model behave a lit­tle weird in the extremes

  • cliffy

    Real inter­est rates in a sim­ple Good­win model are sim­ply the ratio r= (1-u)/u where u is the wage share of out­put, and (1-u) is the invest­ment share.”

    The demand for money does not equate to the sup­ply of every­thing which is not labour, which is what the rela­tion­ship appears to be attempt­ing to say.

    To be true there would need to be no equity.

    Retained earn­ings is a money sup­ply.

    The rela­tion­ship of real assets to lia­bil­i­ties would need to be 1 to 1 which is rarely the case.

    etc etc

  • Glenn Stehle

    David Law­son said:

    Nat­u­rally, as inter­est rates fall fol­low­ing bond yields, the Aus­tralian dol­lar will come back to a more real­is­tic val­u­a­tion, and we will soon dis­cover that Aus­tralia is in fact not dif­fer­ent!

    I wouldn’t be so sure of that. Some­times things take on a life of their own, and a nation’s cen­tral bankers lose con­trol, espe­cially if they embrace the quasi-reli­gious faith in only one pol­icy tool being avail­able in the policy-maker’s toolbox–the manip­u­la­tion of mon­e­tary policy–and refuse to use other pol­icy options avail­able to them. 

    An excel­lent exam­ple is what is cur­rently going on in Switzer­land:

    Why Switzer­land is the new China”
    http://ftalphaville.ft.com/blog/2012/05/31/1023881/why-switzerland-is-the-new-china/

    Another exam­ple can be found in the United States in the naugh­ties. In 2003, Greenspan (I assume in an effort to cool an over­heated econ­omy) started rais­ing the Fed­eral Funds Rate. This, how­ever, had no notice­able effect on 10-year T-bill rates. The Fed­eral Funs Rate in 2003 aver­aged 1.13%, in 2004 1.35%, in 2005 3.22%, in 2006 4.97%, and in 2007 5.02%. The 10-year T-bill rate was unfazed: 4.01% in 2003, 4.27% in 2004, 4.29% in 2005, 4.8% in 2006, and 4.63% in 2007.

    As a result, China man­aged to dig itself a 2 tril­lion $US hole, $1.1 tril­lion in U.S. T-bills and another $800 or $900 bil­lion in asset-backed secu­ri­ties it acquired via the shad­dow bank­ing sys­tem.

  • Steve Hum­mel

    OT, but always rel­e­vant, the topic of the fol­low­ing post I made on Mish Shedlock’s forum under­cuts a lot of think­ing:

    Excel­lent post Mish. The most cogent thing you wrote was “there is a major dif­fer­ence between a bank giv­ing money to play­ers to spend and loans that must be paid back.” 

    And this (GIVING money to play­ers) of course is exactly what must occur if we are to end this cri­sis and go on main­tain­ing a mod­ern econ­omy.
    We must have a mod­ern debt jubilee as I have posted on here for sev­eral years, and as Steve Keen has also come to rec­og­nize as the sane and wise way for­ward. There’s too much at risk not to demand that our finan­cial author­i­ties do exactly that. Away with the author­i­tar­ian finan­cial and moral ful­mi­na­tions on all sides, away with the apa­thetic and overly ortho­dox prog­nos­ti­ca­tions of doom, actions are required. The Chi­nese or Japan­ese char­ac­ter for cri­sis is syn­ony­mous I believe with oppor­tu­nity. The lat­ter expresses the cor­rect atti­tude required at this moment in time. 

    Give the both debtors AND savers $50,000 and require them to uti­lize 75% of it to pay down their debts. If the savers have no debt they get to use the $50,000 in what­ever way they choose. (except they can only use 5% of the $50,000 to spec­u­late with). In 6 months rinse and repeat until the major, MAJOR amount of the debt over­hang is elim­i­nated. Then, when the reset but­ton has been pushed enough times to revive the “ani­mal spir­its” of indi­vid­u­als and busi­nesses, and so that we do not just start the folly all over again by allow­ing the same author­i­ties and insti­tu­tions to stum­ble around in the dark, we must insti­tute a citizen’s div­i­dend and a com­pen­sated retail dis­count. And here is why: 

    As you Mish have accu­rately noted there are all man­ner of reserves slosh­ing around in Bank vaults, and accord­ing to the quan­tity the­ory of money and the veloc­ity of its “cir­cu­la­tion” there should be more than enough money out there to han­dle our prob­lems. The prob­lem of course is: 1) Nobody wants to bor­row, and those that do the Banks don’t want to see for obvi­ous rea­sons and 2) money does NOT cir­cu­late in the econ­omy what it actu­ally does is flow in a cost account­ing cycle from the Banks to pro­duc­ers to work­ers to retail busi­nesses back to the Banks. In a mod­ern cap­i­tal inten­sive econ­omy this cost account­ing cycle insures that there will always be less total pur­chas­ing power than there are prices. AND NO MATTER HOW MUCH MONEYRECIRCULATESIT MUST RE-ENTER THE ABOVE COST ACCOUNTING CYCLE BEFORE IT CAN LIQUIDATE ANOTHER PRICE. COST ACCOUNTING RULES!!!!!!!!!!!! IT CANNOT BE AVOIDED IN THE LEGITIMATE ECONOMY!!!!!! 

    It took a non-econ­o­mist C. H. Dou­glas 90 + years ago to rec­og­nize this fact and being free from the ortho­dox­ies of eco­nom­ics and mon­e­tary sys­tems was then able to think lat­er­ally about it and rec­om­mend rea­son­able solu­tions. Solu­tions which of course were con­trary to the inter­ests of the Banks and finan­cial author­i­ties (as well as the power inten­tions and self inter­ests of labor lead­ers) .….and the rest is his­tory as it is said. In other words the pow­er­ful get to talk and those who oppose their power get to walk, walk that is into the noise machine and buzz saw of the powerful’s abil­ity to con­sciously or uncon­sciously manip­u­late cir­cum­stance while also choos­ing the ortho­dox­ies which insure their con­tin­ued power and con­trol.

    With­out dogma and in the name of valid human psy­chol­ogy I say: “But God hath cho­sen the fool­ish things of the world to con­found the wise; and God hath cho­sen the weak things of the world to con­found the things which are mighty;” ( I Cor. 1:27)

    The A + B the­o­rem is a real­ity. And all of the eru­dite math­e­mat­ics and all of the unex­am­ined ortho­doxy in the cos­mos can­not change that fact. The ONLY way to over­come these nec­es­sary account­ing real­i­ties and keep the econ­omy in bal­ance is to issue inter­est free credit DIRECTLY TO INDIVIDUALS. In other words directly dis­trib­ute a div­i­dend to indi­vid­u­als, and then also uti­lize a retail dis­count to con­sumers (and a cor­re­spond­ing inter­est free rebate of that dis­count back to retail­ers) to pre­vent any cost push or demand pull infla­tion.

    Work will still exist and be nec­es­sary. Pro­duc­tive invest­ment will go on and its par­a­digm need not be changed. But cost account­ing will always be with us.…and an eco­nomic sense of grace is its only pol­icy solu­tion.

  • eco­nom­icmi­nor

    Glen, First off, I would think most savers have ade­quate cap­i­tal to spec­u­late with­out touch­ing the $50k. Sec­ond, it would be unfair to try and keep savers from spec­u­la­tion unless you stopped the big insti­tu­tions from doing the same. Third, for most overly indebted peo­ple, $50k is inad­e­quate.

    Oth­er­wise I agree with what you, Mish and Steve Keen say. After much thought, I hon­estly see no other solu­tion or means of ame­lio­rat­ing the sit­u­a­tion the US has found itself in. 

    In say­ing that, I still do not believe that the dys­func­tional Con­gress and a Pres­i­dent with lit­tle recog­ni­tion of the under­ly­ing prob­lems can or will ever chose to do what makes sense. There would also be many uncon­trolled and unin­tended con­se­quences to this course of action. It would sig­nif­i­cantly reduce income to the Big Bad Bailout Banks plus throw a chaotic wrench into the pen­sion funds through­out the coun­try. It still wouldn’t fix the out of con­trol Medicare imbal­ance nor the incred­i­ble num­bers we have in prison nor the dys­func­tional polit­i­cal sys­tem. It may give the coun­try a slight breath­ing room but with­out fix­ing the under­ly­ing imbal­ances, it would be only a short reprieve, IMHO.

  • Steve Hum­mel

    Eco­nom­icmi­nor,

    I’m not sure whether you are address­ing my ost of Glenn Stehle’s.

    Let me make myself a lit­tle more clear on what I rec­om­mended in my post.

    I rec­om­mend the gov­ern­ment dis­trib­ute $50k every 6 months to each fam­ily (and per­haps $25k for sin­gle adult fam­i­lies). Do this 2 to say 6 times at 6 month inter­vals until most of the debt of indi­vid­u­als is elim­i­nated or their pur­chas­ing power is replaced and returned enough for them to have dis­cre­tionary money to spend.

    Spec­u­la­tion needs to be reg­u­lated gen­er­ally speak­ing. I’m just think­ing that the free money we dis­trib­ute should be used in the best way and not used as some infla­tion­ary way that is an eco­nomic vice.

    I couldn’t care less whether thew TBTF Banks’ power is dimin­ished. That is pre­cisely what needs to hap­pen in fact. So far as pen­sions are con­cerned this is one more very large rea­son to insti­tute a life long citizen’s div­i­dend which would elim­i­nate the need for debt instru­ments for pen­sions. Let equity funds of indi­vid­ual savers’ sav­ings fill that roll if need be. And indi­vid­u­als could place their sav­ings in CD’s or IRA’s.

    The cri­sis is the 800 lb. gorilla of cur­rent prob­lems. A simul­ta­ne­ous bailout and a citizen’s div­i­dend and retail dis­count make the econ­omy and money sys­tem hit on all cylin­ders and trans­form a non-func­tion­ing profit mak­ing sys­tem into one that not only works well, but places power in the hands of indi­vid­u­als with their suf­fi­cient pur­chas­ing power money-votes. If the [res­i­dent etc. have no clue its up to us to wake him and the finan­cial author­i­ties up. I have no delu­sions about the dif­fi­cul­ties of not only open­ing their minds to these real­i­ties, but then also mak­ing it clear that they must indeed exe­cute the leg­is­la­tion that makes it a real­ity. Nev­er­the­less, the mass social move­ment which could make that a real­ity must be cre­ated and the bat­tle won. Even though we have but bro­ken straws we must rebuild the world. To do noth­ing is not an option.

  • eco­nom­icmi­nor

    Steve H,

    You are right in that I was address­ing you. 

    The time frame of pay­outs sounds good. I also believe the TBTF or BBBB need curb­ing and this is a good way. Also the rein­state­ment of Glass-Stea­gal needs to be imple­mented. We need a total seper­a­tion between invest­ment bank­ing and sav­ings banks. 

    As for spec­u­la­tion, once the TBTF are removed from the pic­ture, there is lit­tle dif­fer­ence between spec­u­lat­ing and invest­ing, espe­cially if/when losers actu­ally lose. Things get out of bal­ance when there are no lim­its and no real risks, which is where we are today.

    I do dis­agree that the cri­sis is the 800# gorilla. The rea­sons and the meth­ods the pub­lic came to this cri­sis is the 800# gorilla. Unfunded promises and unfunded pro­grams plus ram­pant under reported infla­tion were at the base of the pyra­mid ponzi shceme. It wasn’t the banksters act­ing alone. They needed oppor­tu­nity and that as pro­vided by the imple­men­ta­tion of dys­func­tional ide­ol­ogy. Orwell called it Dou­ble­Think. The gov­ern­ment wanted to have pop­u­lar pro­grams which no one wanted to fund and the pub­lic wanted ben­e­fits and wars with­out a cost to them. 

    In the last years, the pub­lic had lit­tle choice but to bor­row. The option of play­ing or los­ing gave most lit­tle choice. Add in a lit­tle human nature of greed and hubris and a cri­sis was wait­ing to emerge. Sta­bal­iz­ing the finan­cial end is less than half a fix but bet­ter than no fix IMO.

  • Steve Hum­mel

    Economimi­nor,

    The cri­sis is the CURRENT 800 lb. prob­lem. The under­ly­ing prob­lem is that the eco­nomic and mon­e­tary sys­tems can­not be even rel­a­tively sta­ble with­out adopt­ing a cost free way to pre­vent the inevitable and under­stand­able con­ven­tions of cost account­ing from enforc­ing the build up of debt and hence peri­odic reces­sions and depres­sions. But I’m not inter­ested in con­vinc­ing any­one of that being so at this moment. All of the other things you men­tioned, and what Steve Keen rec­og­nizes with the asset infla­tion would be resolv­able after a citizen’s div­i­dend and com­pen­sated retail dis­count were insti­tuted. We need to make the econ­omy and mon­e­tary sys­tems work with those mech­a­nisms as func­tion­ing real­i­ties. Com­puter soft­ware can make the credit flow in the needed ways and in the cor­rect ratios to resolve the cri­sis. The div­i­dend is to be spent on con­sump­tion, to pay off debt or to be saved. Sav­ing is a cost of con­sump­tion and so in the for­mula of total cost of con­sump­tion over total cost of pro­duc­tion it would lower the retail dis­count to con­sumers. The Dis­trib­u­tive mech­a­nisms of Social Credit are an evo­lu­tion of fiat/credit based mon­e­tary and profit mak­ing sys­tems. They empower peo­ple as indi­vid­u­als and they dis­em­power elit­ist, dom­i­nat­ing and cor­rupt enti­ties. That is exactly what we need.

  • eco­nom­icmi­nor

    Steve H,

    I am no expert on Social Credit (C H Dou­glas). It sounds to me like a utopian ideal that leaves out the basic prob­lem of what I call human nature. I do not believe that laws can pre­vent greed or hubris. Maybe drugs could work? Mankind has sur­vived and pros­pered IMO due to our sur­vival instincts which includes very aggres­sive behav­ior. Gov­ern­ment does have a respon­si­bil­ity in mod­er­at­ing and direct­ing that behav­ior but so far that has only worked inter­mitenly. So far there has been no social order that has come close to what Dou­glas ide­al­ized as far as I know. So the­o­riz­ing about some­thing I do not believe pos­si­ble > hasn’t taken up much of my time. Out­side my early years read­ing sci­ence fic­tion.

    As for defin­ing whether our *cri­sis* is the out­come or con­se­quences of our com­bined actions or the under­ly­ing issues is really just a mat­ter of where you are view­ing the cri­sis from. The com­bi­na­tion of actions caused the unde­sired results. You seem to see the results as the cri­sis. Solv­ing for your def­i­n­i­tion of cri­sis does noth­ing more than kick the can down the road and divert the con­se­quence from one group to another. TBTF or pen­sion­ers would find that the repay­ment value is not ade­quate to fund the lia­bil­i­ties on their books. In many cases, these pen­sions or lia­bil­i­ties are guar­an­tee by the tax­pay­ers… thus the fix isn’t really a fix and the solu­tion isn’t a save for the sys­tem.

    Thus, just a game of musi­cal chairs. And the fix depends on whether you have a guar­an­teed seat or not. In the Keen sce­nario, savers would be rewarded and extreme bor­row­ers not. I am a saver so I would like this. The TBTF and pen­sion and bond funds would not like it. 

    At this point, they have con­trol and we don’t so other than the­o­riz­ing, our best bet is to try and fig­ure out how to nail our chairs to the deck.

  • Steve Hum­mel

    Social Credit is not utopian because rather than forc­ing every­one into some par­tic­u­lar vision of how they should act it actu­ally frees indi­vid­u­als eco­nom­i­cally and mon­e­tar­ily from manip­u­la­tion and dom­i­na­tion by the same cur­rent tyran­ni­cal sys­tems. Thus they have the time and the choice to cre­ate THEIR OWN SENSE OF FREEDOM AND IDEAL LIFESTYLE. That is an essen­tial dif­fer­ence between totalitarian/utopian sys­tems of what­ever stripe which would force every­one into their unfree sys­tem. Eco­nomic and mon­e­tary free­dom is an irre­sistible choice because you would either be wise to accept it or fool­ish not to. Choice is total­i­tar­ian. Free­dom of choice to make one’s own utopian con­cep­tion is itself NOT utopian.

    Free­dom and free­dom of choice (self deter­min­ism) are the deep­est and most basic of lib­er­at­ing expe­ri­ences. That is what a Social Credit soci­ety would enable. Solv­ing that cur­rent lack of such would allow all prob­lems above it to resolve them­selves, or be more eas­ily resolved by Man.

  • Steve Hum­mel

    Above should read “choice is NOT total­i­tar­ian.”

  • Glenn Stehle

    @Economicminor

    You seem to rec­og­nize that eco­nom­ics is insep­a­ra­ble from pol­i­tics, which puts you light years ahead of the econ­o­mists, who labor under the fic­tion that some­how eco­nom­ics can exist apart from pol­i­tics.

    I thus find it sur­pris­ing when you then turn around and state: “It would sig­nif­i­cantly reduce income to the Big Bad Bailout Banks plus throw a chaotic wrench into the pen­sion funds through­out the coun­try.” This state­ment implies that the pen­sion funds (read work­ers) are equal part­ners with the Big Bad Bailout Banks in pre­serv­ing the sanc­tity of cap­i­tal.

    Noth­ing, of course, could be far­ther from the truth. Labor has been polit­i­cally evicer­ated over the past 40 years, and the effects upon the eco­nomic well­be­ing of work­ers could not be more evi­dent. If those with polit­i­cal power were to want to reduce the income of the Big Bad Bailout Banks and pro­tect work­ers’ pen­sions, they could eas­ily pass the nec­es­sary laws to make that an eco­nomic real­ity.

    One has to look no fur­ther than the way cap­i­tal is cre­ated to see the role polit­i­cal power plays in the cap­i­tal cre­at­ing process. For the work­ers, cap­i­tal is cre­ated from the sweat of their brow, the prod­uct of work and match­ing con­tri­bu­tions over a period of many decades. For the finan­cial cap­i­tal­ists, cap­i­tal is cre­ated instan­ta­neously and effort­lessly with the entry of a few dig­its oa com­puter screen.

    One can also look at the way cap­i­tal is destroyed. The cap­i­tal of the finance cap­i­tal­ists is sacro­sanct, and thus guar­an­teed by the gov­ern­ment. That of the work­ers not so much so.

    PBS did an out­stand­ing doc­u­men­tary that explores the ease with which the cap­i­tal of work­ers is destroyed by bank­ruptcy courts. 

    http://www.pbs.org/wgbh/pages/frontline/retirement/view/

    It then explains how those same courts pre­serve the cap­i­tal of the fiance cap­i­tal­ists.

    There really is no sub­sti­tute for hav­ing the judi­ciary, the leg­is­la­ture or the exec­u­tive in your cor­ner when it comes to mat­ters of eco­nom­ics.

  • eco­nom­icmi­nor

    Glen,

    Pen­sion funds are run by the same peo­ple who run the banks and insur­ance com­pa­nies of the world. All edu­cated with the same dou­ble­think eco­nomic the­o­ries. This allowed the banksters to dump/hide/sell tril­lions of *secured debt* to them (with very unre­al­is­tic returns). Cash to pay down debts will implode most pen­sion funds because the imputed returns were a fraud, thus leav­ing many mil­lions of retirees with­out income or with much reduced income. 

    You have to look at both who’s run­ning what and what the con­se­quences would be rather than just the ide­o­log­i­cal dif­fer­ences between them. Most peo­ple in the US are not happy about the bank­ing fraud and bailouts yet have really noth­ing they can do about any of it. No dif­fer­ence with the work­ers and the pen­sion funds. All have the same worth­less reg­u­la­tory over­sight as the banks.. 

    And yes the PTB could pro­tect the spe­cial inter­ests of the pen­sion­ers over the inter­ests of those who have been left out of the eco­nomic pie but that is going down the same road we are on. Either we have free mar­kets that are well reg­u­lated or we have crony cap­i­tal­ism or one of its broth­ers.

    I know many pen­sion­ers who live bet­ter than when they worked. Much more dis­pos­able income. The math just doesn’t work out. Many had as much or more dis­pos­able income while the worked than almost all non union pen­sion work­ers to start with, never saved, never had to and then ended up with far supe­rior retire­ments than the major­ity of the work­ers in the coun­try. Their incomes are based on unre­al­is­tic (fraud­u­lent) account­ing using the unre­al­is­tic returns of scammy secu­ri­ties. And you think their spe­cial sta­tus needs to be pro­tected?

    How will this mess ever get fixed if there are still spe­cial inter­ests that are pro­tected while the major­ity are asked for sac­ri­fice?

    As for the cre­ation of this fic­ti­tious money to be passed around. It needs to be just printed or cre­ated out of thin air and NOT lent into exis­tance oth­er­wise it just becomes another trans­fer from future income to present con­sump­tion. We already have to much of that. 

    Steve and Glenn, thanks for the dis­cus­sion. Doug Stohlman
    if you want to con­tinue, I will be on trav­el­ing all day it will be tonight PST or tomor­row for any reply. 

    Steve, even if Social Credit is a good idea doesn’t mean it is pos­si­ble in a world of humans. Might work in a smaller com­mu­nity but I sure can’t see it work­ing on a planet of how many bil­lion?

  • Steve Hum­mel

    Doug,

    Happy to have the back and forth too.

    Pen­sion­ers, whether they be CEOs or union lead­ers, who have exor­bi­tant pay outs would/will have to con­sole them­selves that they are get­ting a REASONABLE pen­sion plus their citizen’s div­i­dend. That is con­sid­er­ing BOTH their con­tri­bu­tions AND the com­mon Good. It’s the same prin­ci­ple behind declar­ing the quadrillion + dol­lars of deriv­a­tive bets null and void and unwind­ing such so that there is basi­cally no gain. San­ity and fair­ness must rule over insan­ity and priv­i­lege.

    And again a cra­dle to grave citizen’s div­i­dend will elim­i­nate the larger need for pensions…and the asso­ci­ated taxes for social secu­rity as well as those for wel­fare in its var­i­ous forms. 

    Social Credit doesn’t nec­es­sar­ily require a change in admin­is­tra­tion, but rather a change in pol­icy. There is an iron law in both indi­vid­ual and sys­temic psy­chol­ogy. What­ever is one’s actual intent (and pol­icy is only the legal form that inten­tion takes) .…is what will tend to be. Cur­rently the pri­mary inten­tions of the com­pet­ing eco­nomic the­o­ries of cap­i­tal­ism and social­ism are:

    Cap­i­tal­ism: Profit and the will to power of the sys­tem and its busi­ness and finan­cial enti­ties.

    Social­ism: Work and the will to power of the polit­i­cal elite which would admin­is­ter it as well as their cronies.

    Now, if you made the pri­mary pur­pose and inten­tion of the eco­nomic and mon­e­tary systems.…the most effi­cient meet­ing of con­sumers with goods and services.…you could include UNDER that pri­mary pur­pose both profit AND work. And if you sim­ply leg­is­lated a citizen’s div­i­dend (which is really just the per­fect pol­icy expres­sion of both grace and indi­vid­ual free­dom) you’d actu­ally put indi­vid­u­als in con­trol of eco­nomic policy.…which resolves the cur­rent two com­pet­ing the­o­ries’ prob­lems with the will to power of their sys­tem by replac­ing it with the will to free­dom for the indi­vid­ual.

    Every­thing begins and ends with phi­los­o­phy i.e. the ideas, val­ues and expe­ri­ences a phi­los­o­phy intends and so tends to enable. So much more impor­tant that we base and intend our sys­tems on the best pos­si­ble ideas, val­ues and expe­ri­ences.

    The present sys­tems are based on mis­trust, tend to cre­ate hope­less­ness, a lack of affin­ity for one’s fel­low and so make for a men­tal­ity obsessed with exchange i.e. “only this for that”. “There are no free lunches” as so many lib­er­tar­i­ans tend to intone.

    Human nature is really a rather mal­leable thing, and we should guard against think­ing it is some spe­cific entity, par­tic­u­larly an entity which is largely molded by cul­ture. We can say Man is flawed. That is fine. But to say he is nec­es­sar­ily only com­pet­i­tive, aggres­sive, lazy, irre­spon­si­ble etc. etc. is a stretch that smacks of being cul­tur­ally hide­bound. The fol­low­ing quote from C. H. Dou­glas sums up my thoughts on sys­tems and their best and cor­rect inten­tions very well:

    Sys­tems were made for men, and not men for sys­tems, and the inter­est of man which is self-devel­op­ment, is above all sys­tems, whether the­o­log­i­cal, polit­i­cal or eco­nomic.”

  • Glenn Stehle

    @Economicminor at 2:49 am

    Your entire lament seems to boil down to the fact that gov­ern­ments, and espe­cially the fed­eral gov­ern­ment, have proven to be supe­rior coun­ter­par­ties to any­thing the pri­vate sec­tor has to offer.

    The pen­sions of pri­vate sec­tor work­ers weren’t always this vul­ner­a­ble to the vagaries of the pri­vate sec­tor. Jacob S. Hacker calls it “The Great Risk Shift.”

    As Hacker explains in his book by that same name, in the U.S. the Pen­sion Ben­e­fit Guar­anty Cor­po­ra­tion guar­an­tees tra­di­tional defined-ben­e­fit pen­sions. For com­pa­nies that offer tra­di­tional defined-ben­e­fit pen­sion plans, like United Air­lines, nine out of ten employ­ees get the ben­e­fits they were promised. The excep­tions are highly paid work­ers and those who did not reach the age of sixty-five before ben­e­fits are paid.

    Most US work­ers’ pen­sions, how­ever, are now exposed to infi­nitely more risk. The rea­son? Defined-con­tri­bu­tion plans, like 401(k)s, are com­pletely unin­sured, and

    As recently as twenty-five years ago, more than 80 per­cent of large and medium-sized firms offered a defined-beneift plan; today less than a third do, and the share con­tin­ues to fall. 

    It was Rea­gan, backed by Wall Street and right-wing think tanks like the Her­itage Foun­da­tion and the Cato Insti­tute, who ush­ered in this rev­o­lu­tion­ary change. And for right-wing con­ser­v­a­tives, defined-con­tri­bu­tion plans are like the gift that keeps on giv­ing:

    1) They are not insured by the Fed­eral Gov­ernemnt
    2) They are dirt cheap. In the late 1970s, employ­ers devoted more than 4 per­cent of work­ers pay­rolls to pen­sions. By the late 1980s, they were con­tribut­ing around 2.5%.
    3) They are a boon for mutual funds and invest­ment banks, who, Hacker observes, “embraced 401(k)s as the Sec­ond Com­ing.”
    4) And finally, 

    Asked why con­ser­v­a­tives should sup­port 401(k)s, a Her­itage Foun­da­tion econ­o­mist said sim­ply, “When cit­i­zens have a vested inter­est in the econ­omy and own more prop­erty (or invest­ment assets), the more…politically con­ser­v­a­tive your soci­ety will be.”

    All this rev­o­lu­tion­ary change has of course proved to be dis­as­trous for Amer­i­can work­ers. Unions knew this, but were unable to hold back the tide. As Hacker goes on to explain:

    Orga­nized labor had always been a cru­cial force press­ing for defined-ben­e­fit pen­sions. But as unions grew less com­mon, employ­ers had less rea­son to care what they thought. Thus went another motive for tra­di­tional pen­sion funds.

    What we saw dur­ing the GFC was that at the same time pen­sion funds got mur­dered, the finan­cial cap­i­tal­ists got thown a life line. And this hap­pened whether explicit Fed­eral gov­ern­ment guar­an­tees existed or not. Besides the $700 bil­lion in TARP funds, there was another $7.77 tril­lion that the Fed secretly loaned banks around the world against their toxic waste at almost 0% inter­est rates, $1.2 tril­lion to US banks (this was at the high­est day on Decem­ber 5, 2008). All this was done to keep the banks “sol­vent” and “liq­uid” and to pro­vide them with a way to “earn” their way back to bal­ance sheet san­ity.

    This begs the ques­tion as to whether a bank­ing sys­tem depen­dent for its sur­vival upon secret loans from a demo­c­ra­tic gov­ern­ment is in a defen­si­ble posi­tion.

  • Steve Hum­mel

    A cra­dle to grave div­i­dend based on the value of the tech­no­log­i­cal progress of the nation, the value of which is com­mu­nally owned but cur­rently totally usurped by the Bank­ing and mon­e­tary sys­tems is the answer to pen­sions, retire­ment and even the unem­ploy­ment “prob­lem” itself. 

    Cap­i­tal­ists are going to have to con­front the absur­dity of its inter­nal logic some­time. What?, are we going to wait until only 5% of us are merely but­ton push­ers earn­ing an income and have the nations pro­duc­tion shut up behind gates guarded by gun tot­ing secu­rity?

    Like­wise socialist/labor thinkers are going to have to think the same way about work. namely that it is going to become less and less nec­es­sary. For­get about “mak­ing work”. Thats just another enforced usage of everyone’s time and effort in the end. Let peo­ple have the demand they want and need, get extra for their jobs if and while they have one.…and oth­er­wise let us freely choose what to do with our time.

  • Steve Hum­mel

    If I may, to expound upon the value of tech­no­log­i­cal progress itself, and its poten­tial uses. 

    The Bank­ing sys­tem is severely restricted in its abil­ity to lend in an area/nation where there has been no tech­no­log­i­cal progress, no cul­tural her­itage of pro­duc­tive capac­ity built up over time. Cur­rently, in nations that ARE devel­oped the Bank­ing sys­tem usurps ALL of this valu­able fac­tor of production/ability to LEND into and so derive profit from, even though it is a com­mu­nally cre­ated poten­tial and resource. A citizen’s div­i­dend redresses this imbal­ance and has the advan­tage of insur­ing ade­quate demand in the hands of indi­vid­u­als in per­pe­tu­ity so that busi­nesses of all kinds includ­ing Bank­ing are made more sta­bly prof­itable. It should also in fact make for over­all lower inter­est rates due to increased cred­itabil­ity of both indi­vid­u­als and busi­nesses.

    If private/consumer debt is the biggest cur­rent prob­lem then a citizen’s div­i­dend is its most ratio­nal and equi­table solu­tion.

    Tech­no­log­i­cal progress is cumu­la­tive and except for the effects of war imper­ish­able. There is no need to “rein­vent the wheel” in every finan­cial cycle and so this asset can be mon­e­tized and dis­trib­uted con­tin­u­ally. The mon­e­tary sys­tem being cred­i­tary in nature, the credit dis­trib­uted as the div­i­dend and directed mostly toward con­sump­tion or retire­ment of debt would can­cel each other out. Most sav­ings by the vast major­ity of indi­vid­u­als would be uti­lized to purchase/pay off loans much more quickly for big ticket items such as cars, appli­ances etc. and so nei­ther excess sav­ings nor pri­vate indebt­ed­ness would tend to accu­mu­late.

    It is way past time that econ­o­mists and the pub­lic at large woke up to the real­ity of the value of tech­no­log­i­cal progress and the cur­rent unbal­anced dis­tri­b­u­tion of such.

  • I sup­pose it would have helped if I’d started with the right equa­tions. In the Good­win model, u is the wage share of out­put, ie. the pool of hon­estly earned money. 1-u is the profit share, or the demand for invest­ment. So, (1-u)/u = r is the real inter­est rate ie. the price of bor­rowed money.

    With endoge­nous credit, in addi­tion to the wage share there is the debt ser­vice share d, which is, of course, paid by the wage earner. So, the nom­i­nal inter­est rate is i = (1-u)/(u-d). The curves below show i as a func­tion of u for var­i­ous lev­els of d =(0, .05, .1, and .15) with d = 0 being the real inter­est rate (bot­tom curve)

  • The infla­tion rate is sim­ply i — r . The curves for d =(.05, .1, and .15) are shown below.

    Thus, with 2 inde­pen­dent vari­ables, u and d, one can cal­cu­late the depen­dent vari­ables r and i and explain the whole cocka­mamie GFC on the back of an enve­lope to an unin­ter­ested per­son who couldn’t care less about it.