Time to call it quits?

The United States: Salvageable or Too Far Gone?

  • Our nation is strong, we will get through this together and work past our differences.

    Votes: 10 55.6%
  • Our divisions are too deep, best to dissolve the Union peacefully while we still can.

    Votes: 8 44.4%

  • Total voters
    18

WrongHanded

Well-known member
You probably know all the economic mechanics and principals involved; I didn't really need to explain it - I just wanted to state it in terms about what both coins are based on: CONFIDENCE and BELIEF - and those are very fragile supports upon which economic systems depend and can disappear pretty damn fast, and have done so, and neither government nor central bank policies and actions are doing much to bolster them.
We agree. But it's in everyone's best interest that we preserve that confidence and belief. Which I believe is a large part of why stimulus spending is being and has been used.

It's also worth noting that whilst the average debt of US citizens continues to grow, that debt is largely what allows our economy to continue chugging along. And considering that a majority of our economy appears to be based in consumerism - which is largely supported by increasing consumer debt - and much of the US jobs market is also based in consumerism and the service industry; the sustainability of the current economy seems less than certain.

Basically, we can't (as a society) continue to spend more than we make, in order to buy goods and services that provide the jobs we work, that promise the lenders a return on the money we borrow to fuel the economy and supply those same jobs.

It seems like that's a much bigger threat to our economy than the national debt. But perhaps I'm missing something.
 

wiscoaster

Well-known member
It seems like that's a much bigger threat to our economy than the national debt. But perhaps I'm missing something.
I think maybe what you're missing is the almost unthinkable increase in the national debt, which might be seen to be "thinkable" in terms of the artificially low rates the Fed is levying on the government debt they hold, but if those rates are allowed to seek their market rates the national debt service might not be sustainable.
 

WrongHanded

Well-known member
I think maybe what you're missing is the almost unthinkable increase in the national debt, which might be seen to be "thinkable" in terms of the artificially low rates the Fed is levying on the government debt they hold, but if those rates are allowed to seek their market rates the national debt service might not be sustainable.
I understand what you're saying. However, I think the Federal Reserve is unlikely (as self serving as it may be) to put us all in a situation where the value of our fiat currency - and in turn our economy - collapses. Unless they live somewhere other than the US of course.

So do I think the national debt is a problem? Yes. But I think it's a manageable one, precisely because it is based on a fiat currency and interest rates are controlled by individuals with a vested interest in maintaining the value of that currency.

But I tell you what really blows my mind. We have these two separate financial issues threatening the sustainability of our economy (the national debt, and a nation of individuals in debt). And yet it appears that we as a society are more than capable of producing and providing all the essential goods and services required for the sustainability of our society. And doing so with ease. Survival simply isn't an issue, except that the system we use for distribution of essential goods and services is based on that same fiat currency. And yet, how else could we do it?
 

roscoe

Active member
They are two sides of the same coin, or two sides of two coins, actually:

1) Coin #1: debt held as an asset on balance sheets.
2) Coin #2: a fiat currency as the medium of financial exchange.

1) Side #1: private finances.
2) Side #2: public finances.

Debt held as an asset has value only insofar as debt service payments can be made and the holder has a belief in and confidence that the debt will either be repaid in full or can be called in exchange for some asset that has instrinsic market value. Futher, an asset that has a market, period. You lose any of those dependencies: debt service, confidence, belief, underlying asset market, and the debt as an asset goes to zero value and the balance sheet suddenly shows insolvency.

Fiat currency has no instrinsic value and has value only insofar as both parties using it to transact have faith and belief that it represents the fair value of the transaction and retains that value long enough to be useful for the next transaction. If parties have plenty of disposable currency they're willing to part with more to effect a transaction, making the unitary value in terms of the item or service exchanged worth less, or from another viewpoint, a minute erosion of their belief in and confidence about the enduring value of the currency used. That erosion accumulates.

You probably know all the economic mechanics and principals involved; I didn't really need to explain it - I just wanted to state it in terms about what both coins are based on: CONFIDENCE and BELIEF - and those are very fragile supports upon which economic systems depend and can disappear pretty damn fast, and have done so, and neither government nor central bank policies and actions are doing much to bolster them.

The only real danger would be if the underlying economic fundamentals were weak. We are still the world's largest economy, and our currency has been the international medium of exchange since WW2. Our debt was much larger after WW2, and not so much smaller after the Reagan years. We paid those off. Why would now be different?
 

wiscoaster

Well-known member
So do I think the national debt is a problem? Yes. But I think it's a manageable one, precisely because it is based on a fiat currency and interest rates are controlled by individuals with a vested interest in maintaining the value of that currency.
Are you serious?!?! You don't understand it's the mandated function (by law) and official policy of the Federal Reserve to degrade the value of the currency over time? They even have an official target of two percent - that's not a limit, it's a goal.
 

wiscoaster

Well-known member
Why would now be different?
Because much of the rest of the world wants to get off the dollar. Back then there weren't any other contenders. Now, it's not even "the" official reserve currency any more. Several currencies are vying for that position and the IMF combines them into a "Special Drawing Right" based on their fractional use in global financial transactions. The US Dollar Index (which I used to trade years ago) is currently around 92 and a year ago it was around 98. I remember it peaked around 112 sometime pre-pandemic (forget when). So it's already declined in recent history about 17% (who wee - that's $20,000 per contract - I wish I was still trading it, hee hee).
 

roscoe

Active member
Are you serious?!?! You don't understand it's the mandated function (by law) and official policy of the Federal Reserve to degrade the value of the currency over time? They even have an official target of two percent - that's not a limit, it's a goal.

Yes. Inflation by it's nature is an economic stumulator, disincentivizing retention of capital and encouraging spending.
 

WrongHanded

Well-known member
Are you serious?!?! You don't understand it's the mandated function (by law) and official policy of the Federal Reserve to degrade the value of the currency over time? They even have an official target of two percent - that's not a limit, it's a goal.
No. I didn't realize it was mandated (by law or otherwise). But I knew there was an inflation goal. I heard many countries consider 2-3% to be ideal. Better to aim for consistency than have it swing between inflation and deflation, don't you think? What would the alternative be?
 

wiscoaster

Well-known member
No. I didn't realize it was mandated (by law or otherwise). But I knew there was an inflation goal. I heard many countries consider 2-3% to be ideal. Better to aim for consistency than have it swing between inflation and deflation, don't you think? What would the alternative be?
Well, it swings anyway. Stability would be the goal, and is specified by the legal mandate; the bank determines what actual target rate represents "stability". A better alternative would be to give the central bank a single mandate, not two, IMO. The two mandates prescribed by law tend to conflict with each other and artificial manipulation of economic processes to meet both mandates tends to aggravate swings rather than subdue them. Swings are a natural process of all things, economies included. It was central bank actions that precipitated the Great Depression, and it was further aggravated by government policy.

If a fiat currency is the basis for financial transactions, its supply should be inflated at the same rate as the economy grows (or deflated as it contracts) ... in other words, the economic rate should be leading, not money supply. But still, if that ideal was followed, the currency still wouldn't function as a store of value. People need a store of value for resources they need to accumulate and allow to just sit there until needed. Money stored in a savings account loses its store of value over time. That's a disincentive to accumulate wealth. And a disincentive to be prepared for economic downswings.
 
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WrongHanded

Well-known member
If a fiat currency is the basis for financial transactions, its supply should be inflated at the same rate as the economy grows (or deflated as it contracts) ... in other words, the economic rate should be leading, not money supply. But still, if that ideal was followed, the currency still wouldn't function as a store of value. People need a store of value for resources they need to accumulate and allow to just sit there until needed. Money stored in a savings account loses its store of value over time. That's a disincentive to accumulate wealth. And a disincentive to be prepared for economic downswings.

This is an interesting point, and one I'd previously thought about a little. If the purpose of currency is to facilitate trade, being able to "store" our work in held currency seems to be a secondary benefit. And if the primary goal of currency manipulation (in this case the goal of stabilized inflation) is precisely to stabilize the perceived value of a fiat currency which holds no intrinsic value, in order to in turn allow for a more stable economy, I think the desire for that currency to also be a way to store work must remain a secondary concern.

I don't believe allowing the value of our currency to deflate along with a shrink economy is a good idea. If we hit a recession and all the purse strings are further tightened because people believe money they have now will be worth more tomorrow than today, they will hold onto it except when necessity dictates they spend it on essential goods and services. Being that ours is largely a consumer economy, that would be counter productive in working our way out of a recession. For example: if everyone who got a $1400 dollar stimulus check and didn't need to buy food or pay rent (etc) simply kept that money, believing if would be worth more in a few month, the money would not stimulate anything. We'd have people playing the inflation/deflation rollercoaster just like the stock market, where they'd be planning big purchases at times where they could make the most out of their cash. I can only see that leading to a volatile boom and bust cycle.
 

wiscoaster

Well-known member
I don't believe allowing the value of our currency to deflate along with a shrink economy is a good idea. If we hit a recession and all the purse strings are further tightened because people believe money they have now will be worth more tomorrow than today, they will hold onto it except when necessity dictates they spend it on essential goods and services. Being that ours is largely a consumer economy, that would be counter productive in working our way out of a recession.
Well, to be accurate with the terminology, it isn't the value of the currency that deflates. Value of fiat currency is defined only in terms of what it can be exchanged for. It's the supply of the currency that deflates. The value of the currency actually increases in a deflation.

Other than that it's a reasonable argument, especially the point about playing the swings. In a really free market there wouldn't be manipulation in either direction. Such has had a long, bad history of overshooting its targets because the effect lags. We should just allow economic cycles to naturally work themselves through. The only necessary functions of a central bank should be to ensure that the supplies of currency and credit meet the demand and not to push them in one direction or the other. History has shown that it's attempted manipulation of economic cycles that's a root cause of cyclic volatility.
 
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roscoe

Active member
Well, to be accurate with the terminology, it isn't the value of the currency that deflates. Value of fiat currency is defined only in terms of what it can be exchanged for. It's the supply of the currency that deflates. The value of the currency actually increases in a deflation.

Other than that it's a reasonable argument, especially the point about playing the swings. In a really free market there wouldn't be manipulation in either direction. Such has had a long, bad history of overshooting its targets because the effect lags. We should just allow economic cycles to naturally work themselves through. The only necessary functions of a central bank should be to ensure that the supplies of currency and credit meet the demand and not to push them in one direction or the other. History has shown that it's attempted manipulation of economic cycles that's a root cause of cyclic volatility.

The problem with simply allowing economic downcycles to work themselves through is the human cost. The same logic applies to human health - we could deny people antibiotics, eyeglasses, vaccinations, and dental care. A large percentage of people would die of these afflictions (or falling into open manholes without glasses) and in 1,000 years we would have a population with better vision, teeth, and immune systems. But we don't. Or, at least, not since the Nazis.

it is the same with economics. In the past, large numbers of people starved to death or were enslaved as economic circumstances changed. More recently, unemployment, homelessness, and the mortality rate fluctuate as economic circumstances push some people to the brink. We no longer find those outcomes morally acceptable. So, we find ways to mitigate the human cost. One way to do that is to have the government take on debt by printing money, with the understanding that it will be paid down when circumstances improve. They always have in the past (for the US). And encouraging a ~2% rate of inflation is one way of keeping the money in the system flowing throughout the economy.
 

roscoe

Active member
Well, to be accurate with the terminology, it isn't the value of the currency that deflates. Value of fiat currency is defined only in terms of what it can be exchanged for. It's the supply of the currency that deflates. The value of the currency actually increases in a deflation.

Other than that it's a reasonable argument, especially the point about playing the swings. In a really free market there wouldn't be manipulation in either direction. Such has had a long, bad history of overshooting its targets because the effect lags. We should just allow economic cycles to naturally work themselves through. The only necessary functions of a central bank should be to ensure that the supplies of currency and credit meet the demand and not to push them in one direction or the other. History has shown that it's attempted manipulation of economic cycles that's a root cause of cyclic volatility.

Incidentally, history has shown (as does economic analysis) that, in a truly free market economy, wealth and power quickly get consolidated into a very small subclass of people. That is why monopolies are illegal, for example. All you need is a slight head start in a true free market economy, and you can leverage that over generations to accumulate more and more. Again, we tend to find that morally unacceptable. Societies are agreements among people, but if one small group becomes the holder of too much wealth and power, societies tend to want to renegotiate the terms of the agreement, sometimes by overthrowing the governments. So, attenuating the exploitative 'free market' elements of the economy tends to lead to long-term stability in societies.

Free markets are only 'good' to the extent that they provide motivation for innovation and hard work (one of the reasons true state-run command economies fail). If the system is too imbalanced, those incentives disappear. If moving to the right on the X-axis of the Lorenz Curve doesn't move you up on the Y-axis, what's the point? Inflation actually flattens out that curve by discouraging retention of liquid assets over long time periods. And it has actually worked reasonably well, considering that the US is the wealthiest country in the history of the world.
 

WrongHanded

Well-known member
Well, to be accurate with the terminology, it isn't the value of the currency that deflates. Value of fiat currency is defined only in terms of what it can be exchanged for. It's the supply of the currency that deflates. The value of the currency actually increases in a deflation.
I see my error with regards to value of the currency. Inflation reduces the buying power of a dollar; deflation increases it. Thanks for correcting me.
 

wiscoaster

Well-known member
Inflation actually flattens out that curve by discouraging retention of liquid assets over long time periods. And it has actually worked reasonably well, considering that the US is the wealthiest country in the history of the world.
Theoretically, yes, but in practice "worked reasonably well" is only in relation to elsewhere in that (so far anyway) the U.S. has mismanaged that principle less than other countries, but with recent events, I'm no longer confident that holds.
 

wiscoaster

Well-known member
Incidentally, history has shown (as does economic analysis) that, in a truly free market economy, wealth and power quickly get consolidated into a very small subclass of people. That is why monopolies are illegal, for example. All you need is a slight head start in a true free market economy, and you can leverage that over generations to accumulate more and more. Again, we tend to find that morally unacceptable.
Because humans are imperfect and not morally and ethically where they should be, a 100% free market economy does not work and due to human imperfection results in the scenario you described. A lightly regulated market with dispassionate and disinterested oversight, where everyone knows what the rules are, and the rules are applied and enforced justly and fairly, and are consistent over time, works better to distribute wealth most evenly over the broadest range of participants than any other economic system. Unfortunately, that state of affairs seems not to exist any more.

This is no excuse to replace capitalism with any form of socialism because historical precedent tells us that's a very bad idea. Those that don't know the past are doomed to repeat it.
 

roscoe

Active member
Because humans are imperfect and not morally and ethically where they should be, a 100% free market economy does not work and due to human imperfection results in the scenario you described. A lightly regulated market with dispassionate and disinterested oversight, where everyone knows what the rules are, and the rules are applied and enforced justly and fairly, and are consistent over time, works better to distribute wealth most evenly over the broadest range of participants than any other economic system. Unfortunately, that state of affairs seems not to exist any more.

This is no excuse to replace capitalism with any form of socialism because historical precedent tells us that's a very bad idea. Those that don't know the past are doomed to repeat it.

No one is talking about replacing capitalism. Obviously communism is unworkable, for several foundational reasons.

But how you try to shape an economy it depends on your goals. Tax policy is one of the major ways it used to be done. If you want to maximize the wealth and power of a few, eliminate taxes, and only they will have legal, personal, and medical protections. If you want to encourage encourage innovation but reduce wealth dynasties, tax inheritance heavily and make each generation earn their money. If you want to flatten the Lorenz curve, tax progressively so that less wealth can be consolidated at the top. Another is labor law. If you want to have robber barons, outlaw or discourage labor unions and labor regulations. Another is monetary policy - how much money do you want flowing within the system? Does the government help finance home loans? Does the government subsidize farmers? Does the government subsidize education? Does the government subsidize research and innovation?

There are many levers that a government can use. My take is that the US was at its peak when the government was heavily invested in research (e.g. the space program), when labor unions were strong, education was heavily subsidized, and when taxes were heavily progressive. Since the 1950s, wealth inequality has steadily increased in the US, starting really with Reagan and his tax policies. Today, because of the late 20th century tax law changes, many of the the smartest minds no longer go into NASA or medical research - they try to figure out an algorithm to earn 1/1000000 of a cent on millions of stock transactions in high-frequency trading, or sabotaging companies in short-sells, to make a quick profit, while laying off thousands. The incentives are all screwed up, but they do make a lucky few people rich.
 

wiscoaster

Well-known member
....The incentives are all screwed up ....
I agree but I don't think the solution is more incentives, or different incentives, or even the policies you mentioned above if you view them as incentives. Government dictated and enabled incentives always have a purpose of implementing government goals and policies. I think the best incentive is no incentive: just get out of peoples' way and give them the freedom to seek whatever goals they see as best for them, their society, and their country. Sure, some will seek totally selfish goals, some totally foolish goals, but usually what's good for one is good for many and if the one is free to seek that good then the many will benefit. Don't tell people what to do and penalize them when they don't, rather enable people to do what they want and reward them when they do something good and worthwhile.
 

WrongHanded

Well-known member
I agree but I don't think the solution is more incentives, or different incentives, or even the policies you mentioned above if you view them as incentives. Government dictated and enabled incentives always have a purpose of implementing government goals and policies. I think the best incentive is no incentive: just get out of peoples' way and give them the freedom to seek whatever goals they see as best for them, their society, and their country. Sure, some will seek totally selfish goals, some totally foolish goals, but usually what's good for one is good for many and if the one is free to seek that good then the many will benefit. Don't tell people what to do and penalize them when they don't, rather enable people to do what they want and reward them when they do something good and worthwhile.

The problem I see with what you suggest, is it sounds like it would result in some sort of economic feudalism.
 
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