Why is the economy, overall, doing so well?

I posted this in another thread and the only attention it got was to point out a grammar mistake.

I’d suggest the reason that things are going so well (overall) is because the government is running such a large deficit.

Cut the deficit (which the stupid Dems will no doubt do) and I predict the economy will decline. Of course, Dems will also enact more regulation and that will give most of you here something else to blame it on.

I still can’t figure how you think growing the debt is good…

First, let’s address the 800lb gorilla in the room. Conservatives were enraged to the extent that the Tea Party was created because they believed that increases in debt were a fundamental problem that would risk our nation’s future. Fast forward to today crickets

Now the one thing that both parties have agreed on, or at least, they pay lip-service too, is the idea that debt is bad and threatens our future as a nation. The parties go about solving that problem (again via lip-service) in different ways, but what I find really, really, ironic is this president is spending money hand-over-fist and Conservatives everywhere are completely ignoring the debt.

First, I never said that debt was “good” as a rule, it’s not, but it is necessary for a growing economy… Second, if government debt is bad, why is the economy doing as well as it is? If the gov debt is bad, why aren’t people on this forum complaining about the massive rise in gov debt?

That’s not really an answer to your question…

So here, let me try again.

The government creates money when it spends. AS and I (and maybe you too) will go round and round because he’ll claim that the government does not create money it borrows it. RET will tell us banks create it. There’s a little bit of truth in that, but a lot of misunderstanding.

If the government didn’t create the nation’s money, it couldn’t ever borrow it and (under the rules we have now) banks could never lend it.

Think about it, how could anyone pay taxes or buy a bond which can ONLY be done with government money, if the government didn’t create and spend it first?

The reason that deficits are necessary are:

  1. the number of new people entering the workforce increases each month as the population increases. If we go back to 1980, the population has increased by 100 million. If we ran a balanced budget at that time until today, you’d have 100 million more people fighting for the same pile of money (I’ll get to banking in a sec)

  2. Increases in efficiency thanks to technology have reduced the number of people it takes to do work. Go back to 1900 and (IIRC) 90%+ of people were employed directly or indirectly in agriculture. Since eating is paramount to survival, lots of other work that could have been being done, wasn’t. Along comes modern farming and today, something like 2% of people is employed in agro. Where did the other 88% go? Technology freed them up to go do other things. Medicine, science, industry…

One of the reasons we have so much unnecessary work (meaning people make things that we want and not necessarily need) is because we’ve become so much more efficient. Think about accounting before computers. Think about running a company like Sears and Robuck in 1970. Think of the army of accountants it took to keep the books there. Or the army of draftsman it took to build a sub or a plane before the advent of PCs?

Now we can teach kids to do the same thing…

So where did all these people go when their jobs were replaced with a decent laptop and a CAD wiz?

Those people had to find new jobs doing other things, but the next generation of people didn’t do drafting (though a relatively small number do CAD), which meant there were more people to do other kinds of work. Somewhere after WWII we sort of mastered the problem of needs so more people went on to create things we want, excess. These things increased our standard of living.

Today, we’re (on average) 2.5 times more efficient (thanks to technology) than we were in 1980. That means, on the whole, it takes 2.5 times fewer people to do the same amount of work. Now remember we need less people to do the same amount of work AND there are 100 million MORE people today than in 1980. See the potential problem? More people that need work and fewer people needed to do it, UNLESS there is more money driving more demand putting those people to work (as an aside, Japan’s problem is, while technology increases efficiency, their population is decreasing)

If the amount of money in the economy didn’t increase unemployment would increase.

BANKING

Here’s where RET comes in and tells us that banks supply the nation with money, not the government. He’s not entirely wrong, banks do supply most of the nation’s money. But I’m not certain he understands how and I don’t think he understands the government’s role in banking.

Banks create money, they don’t lend savings of other customers. They do not lend existing money, they RISK existing investor money. This allows the economy to grow dynamically. The idea if “crowding out” fiscal resources isn’t a real thing. The only thing that can be “crowded out” is real resources. Since only a small portion of people default (when the industry is properly managing risk) then the amount of money needed to secure debt is a fraction of what is borrowed (you know this as “leverage”).

When a borrower “borrows” money the bank creates money and deposits it in the borrowers account.
What’s really happening is the borrower creates a fiscal instrument of value (the promissory note) and sells it to the bank. A swap happens. The bank takes the note and deposits it as an asset and creates dollars (debt) and credits the borrowers account. Now this is almost always done so the borrower can acquire something of real value which ensures that money created is represented by something of real value in the world.

After the loan is made:

The borrower has money today and future debt. The borrower’s debt, thanks to interest is slightly higher.

The bank has future money and debt today. Because of interest, the bank has slightly more future money than debt today.

The borrowers promise to repay (the banks “future money”) is an asset. It is deposited and traded and sold like it has the value of the principle+interest of the loan).

Interest is the reward that banks earn for risk. Who takes the risk? The saver or the investor? Banks don’t lend savings, they create money, so it’s not the savers that take the risk. But what if someone fails to repay and there is no/ inadequate collateral, who pays then?

The government? In normal times, investors take the loss.

The economy overall gains NO new money because every dollar created has an equal principal debt. If the banking system were to settle up all money created would be offset by a principle debt and would return to zero. Of course, the system relies on the fact that the debt will NEVER become due all on the same day and as a result, in the net, new money is added to the economy equal to the amount of debt that is allowed to accumulate for future payment. Banks create what I would call “temporal money” in that it is temporary. From an economics standpoint, if the government’s spending were to stay the same, then for the economy to have more money, new loans would have to exceed loan repayments.

This is exactly what happened in 2008. Private loan repayments decreased…MASSIVELY.

Here, let’s look at the numbers.


(source: https://www.federalreserve.gov/releases/z1/20191212/z1.pdf Page 6)

The Blue Section

Here we see government borrowing and private sector borrowing (at least in nominal terms) about the same. That is, the amount of money the government is creating and the amount created when borrowers take loans is similar.

The Green Section

Then comes, Clinton, who decides to run the Republican playbook (at least the playbook they talk about but never do, they guilt Dems into doing it) and begins to cut government spending. The result on the non-government side is a MASSIVE increase in private debt. If the private sector had failed to increase its debt, the economy would have shrunk. So instead of growing the economy with government debt, we tried to do it with private debt.,

You can see on the government side in the green section, government spending declines relative to the years before. Factor in inflation and it’s even worse.

In 2001 we get a recession and the economy attempts to reset. BUT along comes the dot-com boom and investors are encouraged to keep borrowing and investing in the IT industry. People get greedy and the wheels come off. The economy should have reset BUT we get the real estate bubble and again investors are borrowing like crazy and the economy keeps going.

Se let’s look at some numbers…I’m going to aggregate debt for the same years between the government and the household sectors.

From 1985-1995

The private sector households borrowed: $2.920 trillion

The government sector “borrowed”: $2.843 Trillion

So these are pretty close to balance between the private and government sector

From 1996-2007

The private sector households borrowed: $9.266 trillion

The government sector “borrowed”: $1,931 Trillion

So Clinton cuts government spending which in turn results in MASSIVE private sector debt which is why the economy grew even though government debt shrank.

Now let’s look at 2008-2015

The private sector households borrowed: $0.329 trillion

The government sector “borrowed”: $9.086 Trillion

Do you see the pattern here?

Set aside for just a second who is to blame, and just look at the numbers. I mean, it’s right here!!!

See how the government and the private sector flip-flop?

Now just look at the numbers from 1996-2015 and you get?

The private sector households borrowed: $9.595 trillion

The government sector “borrowed”: $11,017 Trillion

If Clinton had never cut government spending, there would have never been a massive and radical shift in debt to the private sector. The private sector wouldn’t have fallen on its face and the economy would have plodded along.

The massive shifts resulted in a LOT of waste which I think accounts for the overall imbalance between the government and private sectors from 1996-2015

Just for fun, let’s look at the economy under Trump 2016-2018 (as that is the numbers we have). As I write this, I’m not sure what the result will be (though I have my suspicions)

The private sector households borrowed: $1.526 trillion

The government sector “borrowed”: $2.698 Trillion

And there you have it, folks.

The private sector is borrowing at a decent pace and the government is outpacing the private sector adding lots of new money.

Now what, historically is the problem with creating money? Inflation?

Again, another talking point proven wrong. Money creation does not, as a rule, create inflation any more than gravity causes planes to crash.

The yellow section, the part where the government doubts are debt is the result of the private sector falling flat on its face because, as a whole, the private sector was massively overleveraged and the government had to add money or the economy and potential the nation we know, would have fallen apart.

Trump is literally running the playbook I advocate. Now what I don’t agree with is who is benefitting most from the government’s spending (or lack of taxes as it were). I’d like to see the massive debt go towards repairing infrastructure as a priority (for example), but Trump is proving my theory, though I don’t think the fundamentals are sound because, as I said, who is getting most of the benefits in this economy. Demand will eventually creator OR private sector debt will begin to increase and we’ll rinse and repeat the cycle that Clinton started.

The private sector is on a healthy clip spending AND the government is spending and the result is microscopic unemployment.

I think things would be even better if more of the money we’re making its way into lower quintiles of the economy, and I hope that’s what Dems do next time they get power, but alas, Republicans will trick them, again, into lowering deficit spending and the private sector will probably react by increasing its debt and overleveraging again.

On paper, Dems will get to say that its there party that cuts debt (as a percentage of GDP) and Republicans increase it. Looking back to the last three Republicans and the last three Dems, the debt as a percentage of GDP has increased under all Repubs and only one Dem.

All that said, debt is neither good nor bad. Speed is neither good nor bad. Gravity is neither good nor bad, but in each case, there are instances where not understanding those forces IS bad.

The problem isn’t debt, it’s our lack of understanding of what it is and how it works.

Amazing the you’ve spent so much time, effort and bandwidth producing what amounts to unredeemable BS.

LOL…Dave you really, make me laugh. I’d really like to meet you in person, I bet you’re a real hoot.

I didn’t try to go through your entire post, but I responded to some specific points:

1 I dispute this.
2 I don’t know; or whether it’s actually doing well or not. It seems to be, but I also know that some indicators can be misleading.
3 I wasn’t aware that we were silent on the issue.

4 What they’re “creating” is an illusion. The “creation” of money only results in devaluing the money that already exists, which is effectively a tax. Also, money per se isn’t real wealth (we’ve talked about this in the past).

5 Only because government rules say so; not the laws of economics.

6 The stagnation of western populations (including the U.S.) aside, not so. If you have more people for the amount of money, then the money becomes worth more, and one doesn’t need as much of it for a given purchase.

7 I’ll argue that a lot of this is labor (unions for one thing, and burger flippers demanding $15 an hour for another) pricing itself out of the market. Also, much of that technology is becoming more and more unwieldy. I wouldn’t be surprised to see a society go a Logan’s Run route where people become users and not creators and maintainers of technology, and it collapses because society forgot how.

I don’t know how Mr. Brown holds his job and has time to write all of this stuff. I’m retired, and I don’t want spend my time doing that. It’s much better spent writing articles about political items and coins for hobby publications.

The answer is really simple. It’s freedom.

Donald Trump by executive orders did away with many useless government regulations that were strangling business, especially small and medium sized companies, that supply most of the jobs. People don’t realize how much time an effort a business can waste on complying with government data gathering and regulations.

At the same time, he lowered taxes so that business and consumers could spend more. The lower corporate rates brought a cascade of money back into the domestic economy from overseas. That created new investment and jobs.

Before corporate tax reform, the U.S. had the highest corporate tax rates in the world. Even Barack Obama paid lip service to that problem during his 2012 campaign, but he did nothing. When you tax something you have less of it. That is just a fact of life that Democratic socialists ignore, except for cigarettes and carbon emissions.

Today the Federal Government is collecting record amounts in taxes. Those receipts have gone way up because the capital has been invested in productive purposes. Government over regulation is a drag on almost all that is good. Excessive taxation destroys the economy. The liberal Keynesians would agree to that.

The problem is government spending, and I wish I had answers for that. It’s something that neither party will address. There are “sacred cows” involved like Social Security.

You and I agree tariffs are bad. Bad things are just a vector; it does not predict whether the economy does well or poorly.

Factually, the Treasury Department has several bank accounts. They cannot spend money from these bank accounts, until revenue is credited to them to spend.

That is factually what they do. If you claim they do otherwise, then you are saying the Treasury Department is lying about its activities.

No CS, people do most of their business with vouchers for Government money.

Vouchers which banks print at will. It’s called Inside Bank money, and this is where most of our money begins.

Not as the money the Federal Reserve prints, or the Treasury mints, but as tokens for USD. They outnumber real USD by a factor of 10 to 1.

I’ve yet to see you explain how this doesn’t up-end your theory. Real USD is a marginal part of our own economy.

Brown holds that economic activity is the outcome of the creation of the medium of exchange, and that the more medium is created, the more economic activity will occur.

I think I said that. But banks cannot create money unless the government has created reserves first. Because bank creation is secured by investor capital. Investors cannot get money until the government creates and spends it. From that point, the bank can create all the money it wants provided the Government vis-a-vis the Treasury is willing to create and sell bonds and the Fed is willing to buy bonds and create the reserves necessary to maintain whatever ratio of loans-reserves the Fed deems.

That’s a self-imposed operational constraint.

When the government sells a security, it is simply swapping money it, or banks have created. When it repays it is the opposite. It pays interest via deficit spending which is effective, new money creation.

The potential problem of money creation is inflation. Inflation happens when demand exceeds supply. So the real limit on money creation is real goods and services (keeping it simple because it’s late).

No, economic activity is the result of real goods and services that people want to purchase AND a private sector willing and capable of meeting that demand.

Money and the goods people demand are inextricably linked.

The capacity to create can exist but people can be willing but unable to purchase if fiscal resources are inadequate.

Conversely, the fiscal resources can exist but the real goods and services to purchase them may not.

Money incentivizes the creation of goods, but only to the point that supply and demand are near/ at equilibrium. Thus and economy with real resources and people to do work can use money as a way to put unused resources to work meeting unsatisfied demand.

It’s late and I’m not going into grueling detail, but that’s it at a high level.

Let’s cut through the verbiage.

Money is like the oil in the engine of your car. It lubricates that parts so they slide easily over one another without excessive fraction. If there is too little oil in the crank case, the parts rub together and eventually the machine runs inefficiently or shuts down all together.

A lack of liquidity can cause recessions and depressions. A small recession started in 1857 when the
SS Central America sank with a large shipment of gold. That caused a dip in the money supply, since the country was on a de facto gold standard at the time. In more recent times, bank runs caused those institutions to fail despite the fact that a bank may have had strong portfolio of loans on its books. Today the Federal Reserve has policies that get funds to banks to prevent such occurrences.

When there is too much oil in an engine, it breaks through the seals and in extreme cases can cause the engine to explode. That what happens where there is too much money in the economy. The classic example was the Weimar Republic of the 1920s when massive inflation destroyed the German economy.

There is nothing magic about money. There is nothing “safe” about outmoded systems, like the Gold Standard. All it does is limit the amount of money a government can issue, which can be a good or bad thing. The trick is the regulate the money supply in ways that promote stability and economic growth.

I can agree with that.

That’s an interesting explanation. Another is that an enormous amounts of money were taken out of the economy via repayment of the debt.

Coincidence? Perhaps, but, if we look at ALL of the instances where the government has made a commitment to pay down debt by running large government surpluses (greater than 20% of GDP) have ALL been followed by depression.

Let’s look at them:

1804-1812: U. S. Federal Debt reduced 48%. Depression began 1807.
1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.
1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.
1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.
1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.
1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929.

The last attempt to lower spending started in 1997 when the government cut spending by 15% of GDP and the result was recession (I’d argue 2 recessions)

1997-2001: U. S. Federal Debt reduced by 15%. Recession began 2001 (arguably the effect ultimately resulted in the GFC of 2008)

So no, the economy didn’t fall into depression because a ship with gold on it sank. The value of that gold, in inflation-adjusted terms, was about $550 million dollars. That’s about 60% of the value of a B2 bomber today.

That said, I think the sinking was a contributing factor as there was a phycological effect that caused some panic, but it was the weak economy caused by reductions in spending which drew money of the economy leaving bank-issued money to drive the economy, that was the larger contributor to the depression that followed…

As a follow up…

Fact: Recessions tend to come on the heels of reductions in federal debt/money growth (See graph, below), while debt/money growth has increased when recessions were resolving. Taxes reduce debt/money growth. No government can tax itself into prosperity, but many government’s tax themselves into recession .

Unlike engines, which have a fixed size, economies can increase in size as the number of people in the economy increase thereby increasing the economy’s potential for real output. Also, technical innovation makes it possible to increase output relative to the number of people in the economy,

The practical outcome is that as the engine increases in size it needs more oil. That said, it is possible to add more money into an expanding economy, though in modern times problems have been related to contractions in spending or decrease in output, rather than increases in output that cause na healthy economy to become unhealthy as the result of too much money creation.

Without the metaphor, as the economies potential production increases via increases in population - which has increased by ~33% since 1980 - and increases in productive efficiency - making t possible to create more goods and services per-person - the amount of money needed in the productive economy (as opposed to the fiscal economy) to maintain the health of the economy.

Lastly, as people save it decreases the amount of money circulating in the real economy. If we think that saving is good (and I do), then we need a way to deal with it because savings reduce aggregate demand which of course (all other things being equal) increases unemployment.

Weimar, the poster child of the consequence of money creation policy, is a story that is COMPLETELY consistent with my understanding of economics.

The problems in Weimar started when the Allies destroyed an enormous amount of the nation’s real wealth output. Add to that the French occupation of the Rhineland and the real economic output of the German economy were severely degraded.

Stack on top of that the Treaty of Versailles and reparations, the government was forced to create money to buy gold to pay reparations. This is a perfect storm of economic destruction. Something that is easily predicted by anyone who understands the economy as I do.

Looking at Weimar as evidence that money creation causes economic calamity is like saying that gravity causes plane crashes. it completely ignores a lot of precipitating factors. It also ignores that planes fly safely despite gravity just as economies create money without economic failure.

Weimar failed because it created money without an increase in real output.

Agreed, real output and money have to be created with an understanding of the broader economy.

Money creation and real output are linked. If the capacity of the real economy or the necessity for real production increases outpaces the creation of gold the result will be unnecessary unemployment.

Agreed.

Let’s discuss the role of banking…

Banks take existing investor capital and leverage it. They DO NOT lend existing money outside the banking system. Savers deposits are not lent outside the banking system. Again, banks leverage government money called reserves. Reserves do not circulate in the economy except as cash. In the system, we have, if the government removed reserves, the banking system would fail. Most cash is saved in banks which really just facilitates purchases and returns back into the reserve system. The government arbitrarily sets a reserve ratio which in turn creates an incentive for banks to attract depositors whose money is held as reserves. Today, the government pays interest on all reserves which again, creates the incentive for banks to attract reserves.

The bank creates debt in the form of the money it creates and it uses that money to buy an asset, the borrowers promise to repay.

The principle is created and circulates in the economy and each payment destroys that principle until it is repaid and completely eliminated. As a result, banks do not create permanent money, rather temporal money in that the money exists only as long as the loan that created it.

Something like this.

image

(Extremely simplified)

Each arc loosely represents the aggregation of all bank-created money and how it’s all destroyed at some point in the future. We see the arcs overlap resulting in a steady supply of money in the economy.

The chart I created shows an increase in money over time, but it’s possible, as in the aftermath of the GFC that money creation the amount of money borrowed by the private sector went negative (the arcs were inversed), which is to say that money being repaid by borrowers was more than money created by borrowers. The result is a decrease in the amount of money circulating. The response after the GFC was for the government to increase its spending to offset the decrease in private sector borrowing.

basically, It’s always an unspent income story. For any agent that spends less than his income, another must have spent more than his income, or the output would not have been sold.

I don’t have a lot of time because I’m due to go to a convention, but here is a short answer. The retirement or purchase of government bonds has had nothing to do with starting economic recessions or depressions. In fact retiring or buying government bonds is an expansionary policy. The Federal reserve uses it in its open market operations expand the money supply.

When the government or the Federal Reserve buys a bond, they pay money to the bond holder. That increases the money supply, which encourages expansion. How that works depends upon your economic philosophy.

Recessions and depressions are most often caused by too much debt. The fancy word is “leverage.” When individuals and companies borrow money and can’t keep up with the payments, foreclosures result, jobs are lost, production is effected and economy heads downward.

Other causes are crop failures, loss of export business and misguided government policies can also cause economic havoc. For example, you first example, the 1807 recession was started in large part by Thomas Jefferson’s misguided embargo of U.S. exports in an effort to avoid confrontations with the British on the high seas. It mainly hurt our export business which killed the shipping industry and did nothing to alter British behavior, which was Jefferson’s goal.

The 2000 recession was caused by the Clinton’s idiotic decision to sue Microsoft, causing the “dot-com” bubble to burst. It cost me personally about 50% of my 401k in one, fell swoop.

LOL, Microsoft’s revenue was 0.002% of the economy (and net was less than 1/2 of that) and suing Microsoft is the reason the .com bubble burst? A company at the time with less than 40k employees?

In a suit that never really went anywhere.

That’s pretty creative, I’ve give you that.

And yet, you claimed people could only do their business in Government money. This is not the case.

Most activity is done with inside bank money.

What you describe is what ideally happens, real life is more messy.

Real world, banks lend out inside bank money at excess of the 10% rule. The central bank plays catch up with new reserves.

There are several reasons for why this happens: Certain regional banks are small enough not to need 10% reserves, certain deposits don’t fall under the rule or don’t need reserves at all, money is first deposited into a bank as something other than USD, etc.

The point to take away from this; our monetary system is playing a reactive role. It is not the first mover in new money creation; the private economy is.

And as we’ve been over before, T-bill sales are not creating new money either . The Government, as a rule, has to buy them from someone else who bought them with pre-existing money.

Suing Microsoft PANICKED the investors in the market into selling off much of the market’s equity. Are you REALLY this obtuse?

It may seem to be hair splitting, but money itself doesn’t incentivize anything. Its just a way of keeping score. (We all know what the real motivation is! :wink:)