As politicians argue back and forth about how to stimulate the economy with government spending the Republicans are beginning to challenge some of the basic assumptions of Keynesian economics. The most basic assumption is whether government spending actually does stimulate the economy. One assumption Keynes made about economic growth was the fact it could occur without a profit. We know this since he stated government spending would stimulate economic growth. Governments do not have profits. In N Theory economic growth requires a profit event. N Theory states an entity that spends money without making a profit does not contribute to economic growth.
The argument in N Theory is that spending without making a profit is equivalent to a barter transaction. It is simply moving the current money supply from one hand to another. Economic historian Robert Higgs noted this is equivalent to taking water out of the deep end and pouring it into the shallow end. Would more buckets of water moved from end of the pool increase the amount of water? Would a line of people stretching from one end of the pool moving water from the deep end to the shallow end rapidly increase the amount of water in the pool? Economists believed in just such an absurdity for over 100 years. In fact, the U.S. Federal reserve still abides by this theory. These examples are an adequate description of the theory of the Velocity of Money (MV=PQ) upon which our understanding of the supply of money rests. The speed upon which this transfer is made is suppose to increase the wealth in the economy. Without disparaging the work of Irving Fisher and Alfred Marshall (mentor to Keynes) it amazes me anyone would accept such nonsense.
Such absurd concepts also underlie the idea of redistributing the wealth of the rich. The Democratic party in the United States does not understand taking money from the hands of people who know how to make a profit and putting it into the hands of people who will spend it, does nothing to expand the Money Supply of the country. It is just a transfer. It is barter level economics. A barter economy never grows. It simply stagnates as profit making economies grow and inflate the value of their money. A redistribution economy is doomed to failure.
This brings us to the absurdity of government investment. N Theory states government investment is an acronysm, because the government does not make a profit. Without a profit making possibility an investment cannot increase in value. By definition purchasing something that does not grow in value is not an investment. Infrastructure investment is always pointed out a bright star of government investment, but even that is not valid unless the investment helps a Private Sector business earn a profit. Some infrastructure investment do in fact enhance the profit making potential of the Private Sector. Some do not like new police cars, public building parking lots, school construction, parks, improvement government buildings, new computer systems for public agencies, etc. This is one of the strongest arguments for privatization since all these capital investments do have value in the Private Sector since they make profitability possible.
Wednesday, December 21, 2011
Sunday, November 27, 2011
Keynes' Multiplier
The primary explanation used by Keynes to explain why public investment would spark economic growth and hiring was his "multiplier" theory. The idea was that public money spent on hiring the unemployed to build infrastructure projects would cause an infusion of money into the economy and expand the monetary base causing the economy to grow. Each dollar spent would have a multiplicative effect on the economy. Of course, now we know it did not work. It failed in the 1930s and again after the Global Financial Crisis of 2008.
Why did it fail? N theory shows that it is wealth that the economy runs on, not money. Money is just a placeholder. Money acts like a barter exchange unless there is a profit activity. In a barter economy there is no wealth creation beyond the production of more goods which cannot occur unless the factors of production are free, and that is the situation in only the most primitive societies. It is only in a society with a banking system that expansion of the Money Supply occurs and provides the opportunity for wealth creation. Profit accumulation is the only method of Wealth creation. Profit acts like an asset allowing a bank to make further loans and expand the Money Supply and provide the opportunity for more profit accumulation.
Keynes' monetary expansion since it created public assets, public infrastructure, failed to create a profit making Private Sector asset. The public assets are of no wealth creating value. The Public Sector borrows based on their tax base not public assets. The tax base was not expanded by building public infrastructure. No wealth creation occurs in this process unless the constructor is in the Private Sector and makes a substantial persistent profit over time. Typically, infrastructure projects are one time events limiting the consistency of the profit stream and therefore diminishing the economic effectiveness.
Keynes felt more money in the hands of the unemployed would spark some economic expansion. Now we can see that this did not occur, but it should have been predictable. In a economic downturn businesses are struggling. An injection of a little cash is much appreciated, but it is unlikely to be enough to make a business person hire new employees or expand. It only sustains them in a difficult time. Insufficient wealth is created to change a business person's perspective.
A business person's perspective will only change when the outlook for the economic future changes. This is why the Great Depression lasted until WWII. This is why the Great Recession will last until there is a change in economic outlook. Since government is impotent they should stop screwing with the economy.
Why did it fail? N theory shows that it is wealth that the economy runs on, not money. Money is just a placeholder. Money acts like a barter exchange unless there is a profit activity. In a barter economy there is no wealth creation beyond the production of more goods which cannot occur unless the factors of production are free, and that is the situation in only the most primitive societies. It is only in a society with a banking system that expansion of the Money Supply occurs and provides the opportunity for wealth creation. Profit accumulation is the only method of Wealth creation. Profit acts like an asset allowing a bank to make further loans and expand the Money Supply and provide the opportunity for more profit accumulation.
Keynes' monetary expansion since it created public assets, public infrastructure, failed to create a profit making Private Sector asset. The public assets are of no wealth creating value. The Public Sector borrows based on their tax base not public assets. The tax base was not expanded by building public infrastructure. No wealth creation occurs in this process unless the constructor is in the Private Sector and makes a substantial persistent profit over time. Typically, infrastructure projects are one time events limiting the consistency of the profit stream and therefore diminishing the economic effectiveness.
Keynes felt more money in the hands of the unemployed would spark some economic expansion. Now we can see that this did not occur, but it should have been predictable. In a economic downturn businesses are struggling. An injection of a little cash is much appreciated, but it is unlikely to be enough to make a business person hire new employees or expand. It only sustains them in a difficult time. Insufficient wealth is created to change a business person's perspective.
A business person's perspective will only change when the outlook for the economic future changes. This is why the Great Depression lasted until WWII. This is why the Great Recession will last until there is a change in economic outlook. Since government is impotent they should stop screwing with the economy.
Sunday, November 20, 2011
Transaction Tax
Herman Cain, a possible United States Republican Presidential candidate rose to the top of the voter preference polls in October 2011 until disclosure of previous sexual abuse charges toward women was revealed in November. His rise in the polls was due almost entirely to an economic policy he called 9-9-9. His economic policy included a flat nine percent income tax, a nine percent national sales tax and a nine percent corporate income tax. All these taxes would allow elimination of the federal tax code and generate the same level of revenue as the current tax system. The simplicity of the tax law was appealing to the electorate since it implied fairness.
Another taxation method first proposed by Keynes in 1936 is much simpler. Although Keynes proposed a "financial" transaction tax, expanding the concept to all monetary actions could provide revenue equivalent to the current the USA federal tax revenue. The system could be further enhanced by Private Sector expansion into activities undertaken by peripheral federal agencies.
It turns out such a system only requires a 1% transaction tax on funds transferred from one account to another. Since this transfer is accomplished by the Federal Reserve, collection of the 1% is properly considered a fee and not a tax. The Federal Reserve would extract the 1% fee as the payment moved from one party to the next. Such an idea has broad political support. Steiglitz said such a system with collection by the FED or ECB is practical in this day of electronic money. Krugman said, "It is about time." I have promoted the idea in my book Rule of Money.
Instead of taxing at a rate of 9-9-9, it is possible to structure a federal funding system of none-none-none-1. The 1 being a transaction fee of 1% on all transfers of funds or wealth. To make the system fail safe it is necessary to eliminate all bills and currency and only use electronic money. There are numerous advantages of this change. First, it would collect a fee for illicit activities that go untaxed. Essentially, the drug and sex trade would be revealed. No longer would it be possible to transact drug sales on street corners. No longer would the girls and patrons of the sex trade be anonymous. All this exposure would enable police to better enforce the laws of the country.
Another taxation method first proposed by Keynes in 1936 is much simpler. Although Keynes proposed a "financial" transaction tax, expanding the concept to all monetary actions could provide revenue equivalent to the current the USA federal tax revenue. The system could be further enhanced by Private Sector expansion into activities undertaken by peripheral federal agencies.
It turns out such a system only requires a 1% transaction tax on funds transferred from one account to another. Since this transfer is accomplished by the Federal Reserve, collection of the 1% is properly considered a fee and not a tax. The Federal Reserve would extract the 1% fee as the payment moved from one party to the next. Such an idea has broad political support. Steiglitz said such a system with collection by the FED or ECB is practical in this day of electronic money. Krugman said, "It is about time." I have promoted the idea in my book Rule of Money.
Instead of taxing at a rate of 9-9-9, it is possible to structure a federal funding system of none-none-none-1. The 1 being a transaction fee of 1% on all transfers of funds or wealth. To make the system fail safe it is necessary to eliminate all bills and currency and only use electronic money. There are numerous advantages of this change. First, it would collect a fee for illicit activities that go untaxed. Essentially, the drug and sex trade would be revealed. No longer would it be possible to transact drug sales on street corners. No longer would the girls and patrons of the sex trade be anonymous. All this exposure would enable police to better enforce the laws of the country.
Self-interest & Politics
The concept of self-interest is the strongest motive affecting economic choice. It is not the only criteria for choice. Parents often select children's toys to help the learning process. Many gift choices for children are made out of love. Obviously, this is the case for many purchases made for all the special people in our lives. This type of choice is the opposite of self-interest. Nevertheless, many choices are made out of self-interest and especially choices around preservation of self.
The purpose of politics is to provide protection. So obviously, it is an arena where self-interest is the name of the game. Consequently, selection of a political party is done primarily to protect one's self. The components that a person feels most vulnerable to losing are the same components that will guide their choice of political party. A job for most people is a vulnerable necessity in maintaining their lifestyle. Likewise, wealth is a vulnerable element in the lives of many wealthy people. For many poor people the social services they receive are critical to their ability to survive. Many elderly people are in a similar situation. Consequently, people in these groups will support a political party that will protect these needs.
Much of the electorate is not choosing a candidate based on political philosophy, but rather based on their commitment to maintain critical services that provide protection of the voter. For the elderly it is retirement funding. For the poor it is social services. For the wealthy is police protection and stability of financial markets. For the middle class it is employment at a high level.
For some people it is not their self-interest that concerns them, but the self-interest of vulnerable segments of the population. For many wealthy people this involves helping the poor or elderly. They use their money and voter influence to sway segments of the population to causes they embrace. Similarly, anti-abortion groups often abandon their personal self-interest to protect the unborn. Pro-abortion groups have the opposite view since their concern is for the mother's life. It is just a slight change in perspective that puts these groups at odds.
Ironically, although we all start on a path of shared self-interest we quickly diverge on our own particular trail seeking specific protections for what we deem is "most" important. It is that word "most" that trips us up. What is "most" important is our own protection. If protection of every one's interests proceeded our own self-interest than political choice would be much simpler.
The purpose of politics is to provide protection. So obviously, it is an arena where self-interest is the name of the game. Consequently, selection of a political party is done primarily to protect one's self. The components that a person feels most vulnerable to losing are the same components that will guide their choice of political party. A job for most people is a vulnerable necessity in maintaining their lifestyle. Likewise, wealth is a vulnerable element in the lives of many wealthy people. For many poor people the social services they receive are critical to their ability to survive. Many elderly people are in a similar situation. Consequently, people in these groups will support a political party that will protect these needs.
Much of the electorate is not choosing a candidate based on political philosophy, but rather based on their commitment to maintain critical services that provide protection of the voter. For the elderly it is retirement funding. For the poor it is social services. For the wealthy is police protection and stability of financial markets. For the middle class it is employment at a high level.
For some people it is not their self-interest that concerns them, but the self-interest of vulnerable segments of the population. For many wealthy people this involves helping the poor or elderly. They use their money and voter influence to sway segments of the population to causes they embrace. Similarly, anti-abortion groups often abandon their personal self-interest to protect the unborn. Pro-abortion groups have the opposite view since their concern is for the mother's life. It is just a slight change in perspective that puts these groups at odds.
Ironically, although we all start on a path of shared self-interest we quickly diverge on our own particular trail seeking specific protections for what we deem is "most" important. It is that word "most" that trips us up. What is "most" important is our own protection. If protection of every one's interests proceeded our own self-interest than political choice would be much simpler.
Wednesday, November 16, 2011
Keynes Investments
During Keynes' lifetime there was no distinction made between Public sector and Private sector investment in economic theory. Investment was investment. In fact, Keynes justified increasing Public sector investment to replace diminishing Private sector investment after the stock market crash of 1929. Treating investment in the Public and Private sector as equivalent seems like an obvious oversight on his part. Certainly some types of investment are more likely to spark increased economic activity than other investments. For a private investor choosing the right investment depends on the degree with which an investment will increase in value. This is especially true of a stock market investment and less so for a bond purchase, but the potential increase in value of each investment plays a major role in the selection of which product to purchase.
Keynes, on the other hand, only followed the investment cycle from a savings account into a private company or into a public agency where the funds were used to pay a salary or purchase a product. He gave no further consideration to what happened to the money after this transfer, but it is the next step that sparks economic growth. If the money ends up in a business it is likely part of a process of profit making. Profit expands economic growth. If the business segment is growing the company may use the funds to leverage additional business loans. Business loans have the potential to increase investment capital tenfold when a bank uses the Federal Reserve System. This path is much preferred to a company simply paying an employee's salary. The employee might use the funds to pay his federally insured mortgage or send his salary into another investment dead end. Such an investment in our current situation does earn anyone a profit, and therefore, is economic growth neutral. Unless the salaried employee purchases a product from a company making a profit and growing, there is no resultant economic growth. For instance, an employee spending most of his money on food from subsistence farmers is not expanding the economy by spending his salary. This type of exchange is a barter level trade.
Only Private sector investment advances economic growth. The federal government of the United States calculates economic growth by the rate of GDP growth. Unfortunately, federal expenditures from tax collection and borrowing are part of GDP. Does this make sense? It does not. Imagine if there was no Private sector and all expenditures were from borrowed funds and the government increased their expenditures 12% per year. Would you believe the government that economic growth was increasing by 12%? The way GDP figures are used this would be correct, but it isn't. Government expenditures should never be part of GDP. Economic growth is the increase in the profitability of the Private sector. From the government perspective if economic growth is 12% their tax revenues should increase 12%. From the Private sector perspective under this scenario businesses will know the size of the market for goods and services will increase 12%.
Keynes, on the other hand, only followed the investment cycle from a savings account into a private company or into a public agency where the funds were used to pay a salary or purchase a product. He gave no further consideration to what happened to the money after this transfer, but it is the next step that sparks economic growth. If the money ends up in a business it is likely part of a process of profit making. Profit expands economic growth. If the business segment is growing the company may use the funds to leverage additional business loans. Business loans have the potential to increase investment capital tenfold when a bank uses the Federal Reserve System. This path is much preferred to a company simply paying an employee's salary. The employee might use the funds to pay his federally insured mortgage or send his salary into another investment dead end. Such an investment in our current situation does earn anyone a profit, and therefore, is economic growth neutral. Unless the salaried employee purchases a product from a company making a profit and growing, there is no resultant economic growth. For instance, an employee spending most of his money on food from subsistence farmers is not expanding the economy by spending his salary. This type of exchange is a barter level trade.
Only Private sector investment advances economic growth. The federal government of the United States calculates economic growth by the rate of GDP growth. Unfortunately, federal expenditures from tax collection and borrowing are part of GDP. Does this make sense? It does not. Imagine if there was no Private sector and all expenditures were from borrowed funds and the government increased their expenditures 12% per year. Would you believe the government that economic growth was increasing by 12%? The way GDP figures are used this would be correct, but it isn't. Government expenditures should never be part of GDP. Economic growth is the increase in the profitability of the Private sector. From the government perspective if economic growth is 12% their tax revenues should increase 12%. From the Private sector perspective under this scenario businesses will know the size of the market for goods and services will increase 12%.
Tuesday, November 15, 2011
Velocity of Money
The Velocity of Money is a principle of conventional Economics that persists today even though it is an absurd extraction. The equation of this principle was first stated by Irving Fisher, one of the stalwarts of 20th century American Economics. The equation is MV = PQ. P is Price and Q is quantity of products. So the price of all the products sold in a period is equal to the quantity sold times the price and this is equal to MV. M is Money and V is velocity of sales in a period. Make V = 0 and all the products sold in a period are equal to all the Money used to make the purchases. Very logical, but there is one complication. Since money is not consumed after the sale the merchant has the Money to use and make an additional personal or business transaction within the same period. In calculating PQ we added all the purchases within a period so we need to know how many times the same Money was used in a period to assign a value to V. To do this in the United States we rely on figures from the Federal Reserve to determine the amount of money available to make purchases. This allows us to fix the amount of Money in the economy during a period. V now becomes the factor in the equation necessary to equalize the equation. It turns out this factor called Velocity is usually between 2 and 3.
From this principle Economists derived a couple of assumptions. First, it seems increasing velocity means increasing sales. Second, it implies if the amount of Money increases and Velocity does not change then Sales will still increase. That is the priciple. The next jump is where the principle falls apart. Economists stated increasing Sales implies economic growth.
Let's see how this theory works in the real world. Imagine yourself as a Day Trader with $100,000 to invest. In the first hour of the market you purchase a stock for 100 k. One hour later you sell the stock and pocket a 5 k profit. Thirty minutes later you buy a new stock for 100 k and sell it 30 minutes later at a profit of 5k again. Just before lunch you buy another stock and sell a couple of hours later for a profit of 10 k. So far you are up 20 k. But in the afternoon you make another 100 k purchase and immediately the stock starts to fall, by the end of the day you feel you must sell and loose 20 k ending the day and the period just where you started. According to the "quantity equation of exchange (MV = PQ)" the equation looks like this 100,000 * 4 = 100,000 * 4. The equality works, but was there any economic growth? No, Money just went back and forth between the Day Trader and his Broker.
You could craft a similar scenario between a Grocer who supplied milk to the Barista across from his store. It does not matter how many times the Barista spent her earnings to purchase milk at the grocery. What does matter for economic growth is the profit she made and the profit the grocer made. The Day Trader can contribute to economic growth, but he needs to make a profit. Spending Money without making a profit does nothing for economic growth. The Velocity of Money is just a calculation of how many times consumers divide their spending. It does not tell us anything about how Money grows. Profit is the primary economic growth mechanism.
When government taxes their citizens and spends the funds on a new fire truck no one makes any money. If the price of the fire truck is $300,000 then PQ = 300,000 * 1 = 300,000 * 1 = MV. No economic growth occurs, but if the fire truck is purchased from a private firm the PQ = MV possibly looks like this: 300,000 * 1 = (250,000 + Profit) * 1. The private firm makes a $50,000 profit on the sale. The $50,000 is additive to the economy stimulating economic growth.
From this principle Economists derived a couple of assumptions. First, it seems increasing velocity means increasing sales. Second, it implies if the amount of Money increases and Velocity does not change then Sales will still increase. That is the priciple. The next jump is where the principle falls apart. Economists stated increasing Sales implies economic growth.
Let's see how this theory works in the real world. Imagine yourself as a Day Trader with $100,000 to invest. In the first hour of the market you purchase a stock for 100 k. One hour later you sell the stock and pocket a 5 k profit. Thirty minutes later you buy a new stock for 100 k and sell it 30 minutes later at a profit of 5k again. Just before lunch you buy another stock and sell a couple of hours later for a profit of 10 k. So far you are up 20 k. But in the afternoon you make another 100 k purchase and immediately the stock starts to fall, by the end of the day you feel you must sell and loose 20 k ending the day and the period just where you started. According to the "quantity equation of exchange (MV = PQ)" the equation looks like this 100,000 * 4 = 100,000 * 4. The equality works, but was there any economic growth? No, Money just went back and forth between the Day Trader and his Broker.
You could craft a similar scenario between a Grocer who supplied milk to the Barista across from his store. It does not matter how many times the Barista spent her earnings to purchase milk at the grocery. What does matter for economic growth is the profit she made and the profit the grocer made. The Day Trader can contribute to economic growth, but he needs to make a profit. Spending Money without making a profit does nothing for economic growth. The Velocity of Money is just a calculation of how many times consumers divide their spending. It does not tell us anything about how Money grows. Profit is the primary economic growth mechanism.
When government taxes their citizens and spends the funds on a new fire truck no one makes any money. If the price of the fire truck is $300,000 then PQ = 300,000 * 1 = 300,000 * 1 = MV. No economic growth occurs, but if the fire truck is purchased from a private firm the PQ = MV possibly looks like this: 300,000 * 1 = (250,000 + Profit) * 1. The private firm makes a $50,000 profit on the sale. The $50,000 is additive to the economy stimulating economic growth.
Friday, November 11, 2011
Rule of Money
A couple of years ago I was mulling over the difference between gold coins and paper money, when I realized one is a real thing and the other is a concept. This meant gold was a commodity subject to the laws of Supply and Demand and paper money was not. Paper money was a concept. A concept like money, riches, earnings or love and peace was not subject to the Laws of Supply and Demand, because there was no limit to how much you could have. Paper money was only subject to the method of acquisition. The only Rule of Money is that it must be earned.
I used that Rule of Money as the title of my book and proceeded to investigate what the consequences were for the economies of the world. It ends up that a country can use the concept to provide free education funding, free health care funding, free retirement funding and income for stay-at-home Moms. It also means every citizen in a country following Rule of Money principles will have more money to spend. It means every country will have more wealth to use reducing their debt. It means every country will have more job oppportunities.
Of course, injecting more money into a society brings out the Supply and Demand purists arguing that increasing the quantity of money brings on inflation. Solving this dilemma required a review of economic principles and creation of a new simpler economic theory. I call this new perspective N Theory. It is based on the observation Economics is about the purchase and sale transaction, and not about solving the scarcity problem. The are many other groups solving those issues like the agricultural industry, the energy industry, the clothing industry, the toy manufacturers and the housing industry. How they do it is interesting, but it is not based on Economic principles it is built on business principles.
Back to inflation, N Theory explains it is not the quantity of money that causes inflation, but a lack of competition. It is so obvious. A few merchants at Christmas with the season's hottest toy and the price goes up. If Christmas bonuses are up does the price go up, maybe, but not likely. Why do economists feel it necessary to create such as convoluted explanation for inflation? Simply, because it fits with the principles that underlie their profession. That is why I created N Theory so they would have a podium to hang onto.
I used that Rule of Money as the title of my book and proceeded to investigate what the consequences were for the economies of the world. It ends up that a country can use the concept to provide free education funding, free health care funding, free retirement funding and income for stay-at-home Moms. It also means every citizen in a country following Rule of Money principles will have more money to spend. It means every country will have more wealth to use reducing their debt. It means every country will have more job oppportunities.
Of course, injecting more money into a society brings out the Supply and Demand purists arguing that increasing the quantity of money brings on inflation. Solving this dilemma required a review of economic principles and creation of a new simpler economic theory. I call this new perspective N Theory. It is based on the observation Economics is about the purchase and sale transaction, and not about solving the scarcity problem. The are many other groups solving those issues like the agricultural industry, the energy industry, the clothing industry, the toy manufacturers and the housing industry. How they do it is interesting, but it is not based on Economic principles it is built on business principles.
Back to inflation, N Theory explains it is not the quantity of money that causes inflation, but a lack of competition. It is so obvious. A few merchants at Christmas with the season's hottest toy and the price goes up. If Christmas bonuses are up does the price go up, maybe, but not likely. Why do economists feel it necessary to create such as convoluted explanation for inflation? Simply, because it fits with the principles that underlie their profession. That is why I created N Theory so they would have a podium to hang onto.
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