Why They Are Called Numbers

Those of us who have learned the ability of numbers, properly deployed, to explain and illuminate have always had difficulty understanding where the name “numbers” came from.

All you need to do is attend a typical talk by a concerned, active, engaged but not especially informed person on almost any subject of collective importance.

Then you will see numbers being used to numb. So many million pieces of plastic in the Pacific. So many gallons of oil in the Gulf. So many trees saved. So many billion dollars saved. So many thousand jobs lost. Always without context, without weight, without comparison. Not meant to explain. Meant to numb.

Numb numbers are the sign you are wasting your time. If after hearing the numbers you say, not “yes I already knew that” or “wow, that really opens my eyes to how things work”, if your response to the numbers is “yayyy” or “ewww”, you are being victimized by numbing numbers.

Is Debt Conserved?

Arthur Smith makes an interesting argument.

I don’t understand what a global overall “borrowing from the future” could mean in any physical sense. Maybe you have something specific in mind?

With monetary debt every loan has two sides: the borrower and the lender. There is a promise that the borrower will pay back the loan – with interest, so that’s a promise of future exchange, a commitment by the borrower to redirect some of his future income to the lender. But there is no physical constraint involved: it is merely a contractual obligation between borrower and lender, and can be broken under various conditions without any fundamental damage to the world.

Clearly every time a dollar is borrowed, a dollar is owed. The transaction of borrowing money does not create or destroy total wealth in itself; one party owes a dollar, another is owed a dollar, so in the aggregate nothing happens.

After acknowledging that this is absolutely algorithmically true, I note that it is not what my conventional Keynesian macroeconomic prof taught me in Econ A01 at Northwestern in 1973 or so. (Wish I could remember his name, Robert something I think, he was an adviser to McGovern’s campaign shortly thereafter.) He did not teach Keynesianism as a theory. He taught it as established fact. We would never ever have another depression because Keynes.

According to professor Bob, “public debt is OK, because we are borrowing from our future selves“.

So did we borrow from our future selves (thus committing to growth) or did we borrow from the Chinese (thus giving them an asset to balance our deficit).

Well, the crucial thing to understand is that the bank and the government can lend money that they don’t actually have. This has always been the secret of banking, and why, ordinarily, having a bank is the best possible business, with the possible exception of evangelism. In fact, when you put money on deposit at the bank, the bank gets permission to lend out some multiple, larger than 1, of that money as loans. This quantity is controlled by government fiat in some way.

I believe something very much like this is true in every non-Islamic country, by the way, except maybe the very weirdest pseudosocialist autocracies like Myanmar and North Korea. It includes contemporary Russia and China, though perhaps not their communist predecessors a generation ago.

So the point is, something did happen in the aggregate. The total of assets and liabilities remains zero, of course, by the fundamental theorem of accounting ledgers. But the absolute quantities of liabilities increased.

Now, why is the bank lending you money? After all, a bird in the hand is worth two in the bush, right? Well, because you agree to pay back the loan, plus inflation, plus coverage for the bank’s risk, plus a profit for the bank. As we all experience with mortgages, in the end this is a significant penalty. It does not show as part of your or the bank’s credits or debits (if you win the lottery tomorrow, you can settle your mortgage account with the bank next week, after all) but is something you implicitly owe the bank in addition to the amount you borrowed.

This is the engine of capitalism and it runs on optimism. The bank has some confidence that you (or your insurance company) will repay, or find someone else who can repay to buy the house from you, or in the worst case, that it can resell the house after repossessing it. In any case, the likelihood of losing most of the value of the house (or business) is small enough that it can be placed in a statistical category on which a profit can be made.

When you take out a mortgage, you are borrowing from the bank. But you are also committing your household to a specific level of economic function, such that you expect to be able to pay off the house and all the financial overhead associated with the loan. So although you are borrowing from the bank, you are also borrowing from yourself. You are saying, in order to have the pleasure of living in a house before I have paid for it, I promise to work hard enough to have enough surplus to pay for the house and the financial overhead.

You are borrowing from your own future earnings. If you expected to lose your income, you would not take out such a loan. If the bank expected that, they would not give it to you. At least, that was the idea until recently, but let’s leave aside how the pattern failed.

The point is that when China buys US bonds, China is assuming that the US will pay them off.

If Tea Partiers come in and break the US economic system because they are too stupid to learn how the system works before taking hold of it…

Well, it could break in a number of ways that my Keynesian prof would have found absurdly unlikely, let’s just leave it at that.

But in the aggregate, every loan that isn’t disguised charity is an optimistic bet on the future of the debtor. And pretty much all the money comes into its strange ghostlike existence through such loans. So every dollar in circulation represents most of a dollar bet on the future. It’s a “promissory note” that no longer promises gold or silver. It simply represents somebody’s promises to gladly pay the bank on Tuesday for a hamburger today.

And as for Treasury bills, they are a special debt that is explicitly incurred by the nation as a whole, so its implicit problem is for the future prosperity of the nation. Without growth, the debt payments gradually become insurmountable. Without growth, that is, borrowing from your future self is destructive.

And that is why I think Krugman is not entirely right. We can’t necessarily take up as much public debt as is needed to go back to “full employment”, never mind expect the private sector to pick up the slack when “demand” goes back to baseline.

At this point future growth is not a sure thing. At some point, it becomes a sure not-thing. And whatever that point is, it’s not clear we should be carrying debt at that time.

Fortunately there is an immense amount of wealth in the US and the wealthy are hugely undertaxed, so if anybody were making any sense there would be no reason to take on any debt.

But eventually, debt does matter.

What happens when the optimism is misplaced? Well, we are seeing exactly that now. The sudden disappearance of “wealth” and widespread increases in various stresses and demands, even though little or no physical damage was incurred!

This is bad for the debtor and bad for the creditor. It is no zero-sum move for the creditor to write off the loan and the debtor to lose access to credit. And this bad thing happens when growth is less than foreseen. And a worse thing happens when zero growth is foreseen.

Nothing.

Nothing happens. Zero growth, basically zero credit. And since we have arranged things so that we can only feed ourselves when something happens economically, well, everything goes to hell in a hurry.

So we’ll have to change that. But the holders of debt will not like any prospect of growth stopping. Not one bit.


Zorg: I hate warriors, too narrow-minded. I’ll tell you what I do like though: a killer, a dyed-in-the-wool killer. Cold blooded, clean, methodical and thorough. Now a real killer, when he picked up the ZF-1, would’ve immediately asked about the little red button on the bottom of the gun.

Shoulda Toljaso

I don’t know if I’m on record at all about this, but I always thought the Euro was a crummy lousy stupid idea for the Europeans.

My reasoning is that of Jane Jacobs, in Cities and the Wealth of Nations: “Jacobs makes a forceful argument that it is not the nation-state, rather it is the city which is the true player in this worldwide game.” as Wikipedia has it. But a lot of people miss the real upshot of that treatise, which is that for every currency, a dominant city tends to emerge.
This has been somewhat masked in the United States, with its immense mobility and uniformity. It has been difficult for one region to come to dominate the others and thus benefit from the revaluing of the currency (down at times when the dominant city is relatively weak and up when it is strong). In Canada and Mexico, as in non-Euro Europe and elsewhere, the emergence of a dominant metropolis per currency has been obvious.
In America, the whole Northeast from Chicago to Boston to Washington forms a single metropolis with great mobility. Its only obvious competitors have been the two California conurbations. At this point, as commodities become dominant, the Texas triangle (including all five big cities) may emerge as the winner. But the game is still on.
In post-Euro Europe, the Ruhr Rhine valley has always been a contender for dominance. The value of the Euro is thus set high because of the success of Germany. This strangles the Mediterranean, which is prevented from devaluing its currency and thereby promoting growth of local industries.
The absolute ungovernability of the Euro zone just means that the dysfunction of the USA as a modern state has been inherited by the United States of Europe. It’s cargo cultism: the advantages of the USA can never be implemented in Europe because of the plethora of cultures and mores. The Euro zone never made much sense, except as an effort to replace the dollar as the reserve currency of the world, which never happened, and as it appears now, a good thing.
The Euro treaty should be unwound, and local currencies re-established in Europe to re-establish quasi-normal economic activity for a while. Is that a good idea? I think it’s better than trying to glue together something which can’t function properly as a whole. And in the long run, Europe’s multiple currencies present a huge competitive advantage on Jacobs’ theory.
America, however, should not opt for fifty statewide currencies. America has an advantage in its capacity to inflate its way out of debt. That America has not eagerly opted for as much inflation as it can swallow is another aspect of its political confusion these days as far as I can see. Nobody else has their debt denominated in their own currency! Plus, inflation would greatly untangle the real estate mess, as the real value of the debt will shrink relatively quickly.
I must be wrong, of course. I can’t possibly understand these things better than everybody else. So I’m open to being set straight…

Jaron Lanier and the Morita Principle

Jason Jaron Lanier defends money. (long, but excellent video rant here)

He begins in the same place I do, and Rushkoff does, essentially, that there is no longer a market for labor.

To be sure he only makes passing reference to limits to growth. I think those greatly complicate the situation.

But Lanier’s key point about money is, um, right on the money. Between smothering bureaucracy and cruel neglect, there stands only one possibility: a functional middle class.

And for this to happen, bespoke creative work has to be valued. There is no limit to the amount of art we can produce OR consume. We may be at the beginning of an immensely creative era, but only if we agree to monetize creativity. How to do this requires some careful thought. The idea that we are all in the midst of an endless apprenticeship (while traditional commercial and industrial modalities vanish all around us) doesn’t scale.

But I think we have to let go of growth, or many other things break. So that complicates the job; real things cannot constitute a vanishingly small part of the economy in any way that is stable. Else, you end up with a tulip crisis, of course.

Somehow this all has to be balanced, growth gradually and smoothly ended, fairly soon in the richer countries; somehow all the global constraints have to be fed into the incentive systems too. Nothing resembling government today is competent to do these things. But I don’t see how we manage without burning new constraints into the system.

It’s going to be enormously hard to even get people to understand the spectrum of possibilities.

I call it Morita’s principle; Akio Morita (the Steve Jobs-like visionary behind Sony for many years) frequently said “the customer does not know what is possible.

This applies to our collective vision of the future. People are selecting from a profoundly demoralizing pair of implicit competing visions (universal poverty on the left; militarized wealth in a sea of poverty on the right, both in a diminished, biologically depleted world). We need to create a shared vision of a future that is something other than extrapolation, something other than a more comfortable car to be stuck in traffic in, something other than shabby and grim and dehumanizing.

But most of our customers, that is, the people who need to buy into some new more inspiring vision, are mostly stuck in their day to day problems and just want strategies to see them through the week, not the century.

We must ask people for a lot of thought and a lot of effort and some sacrifices. We cannot succeed without a positive vision of the future, something that no political party anywhere is offering in any credible way at this time.