Thoughts On A Digital Economy

We are living in a world on the brink of massive change. The powerful institutions will fight with everything they have to prevent that change and perhaps they will succeed. Here is my world if they fail.

The cafe was more crowded than normal, but Jayden had a regular booth. The flame wars had begun again. Such a waste of time. He ordered a beer.

"Hey, you exchanging reps tonight?"

"I got plenty," replied the bartender.

"Then make it a cheep beer, " replied Jayden.

Reputation was the only thing of value in a digital world. Jayden worked alone and avoided most flame wars. He earned less, but lost less as well. In front GlobalHell launched an attack. Most do it for rep but Jayden knew this was cover for a "log run." A digital attack on the analog world. Jayden waited and sipped his beer. He watched his favorite tube and chated with some friends about the show. Ella broadcast her latest episode. Jayden's rep gets him into the live chat.

A ping came from his sniffer. The log run had finished. Jayden walked over to Caleb.

"I'm lookin to sell a few reps," confides Jayden.

"Sorry, man I need the cheese."

Caleb saw Jayden's disappointment.

"Hey look. You've always been solid with me. I gotta cheese head lookin to score some rep. I'll put you in."

Cheese heads are the analog businessmen and financiers. They make their money in the digits, but they make analog money. A cheese head needing to impress will pay good money for rep. It would destroy the value of rep if it weren't for the fact they are largely spoiled rich guys used to getting whatever they want. They don't understand the new world and lose reputation faster than they can buy it. When someone is suspected of paying for rep someone will ask aren't you Aubrey or some other cheese derived name.

"Yeah that would be great." replied Jayden.

"Saw your tut on back end UIKit. That was fresh. You know I could always use more digits."

"Thanks, " Jayden beamed.

Rep is more than a way to keep score, it is its own reward. The beards in the lecture halls don't understand it so they pretend it doesn't exist.

"but I'm OK alone," he continued.

"You're never alone. Just remember that."

Caleb turned to his gang and Jayden went back to his booth to wait for the suit. Jayden prefered making his cash picking up gigs on the net, but his latest vid took more time than expected. Jayden hoped this suit wasn't 5-0. Nobody has yet figured out what the crime is, but the government and the corporations can't get a piece of it so it must be illegal. They trump up charges and try to flake a digizen. Luckily Digizens United is very good at making evidence disappear.

$200 haircut and a Movado on his wrist. The cheese head wasn't fooling anybody.

"Time to make some cash." thought Jayden.

Finance Is Not A Free Market

If we look at Financial institutions the constant claim is that they are private companies and should not be heavily regulated. But this is simply wrong.

We can argue till we are blue in the face that regulating is good for the economy, but this is irrelevant. We are ignoring the role of the Federal Reserve. If the economy heats up, the Fed raises interest rates and when it slows down, it lowers them. When there is a rise in the value of a currency, the treasury prints more money. But why do this if the market is always right? Because financial institutions are not private corporations. They are publicly funded private/public partnerships. The way it works is like this.

Banks try to make obscene amounts of money any way they can. When they make too much, the Feds come in to modify the economy in some fashion to slow runaway growth. When they make too much, the Feds give them money for free.

OK. Here's one example of how this works, or I should say doesn't work. The economy slows down and the Feds lower the rate for BANKS. Not for everybody, only banks. This means that banks can make more money if they loan more money. But then there is a wall. What happens if the Feds cut rates as much as they can and it still is not enough? Liquidity trap. Banks borrow money at almost no interest or even zero interest. But if the economy is so bad there is no point in lending for profit, banks look for old debt that paid more and they buy that.

A bank gets free money so it can lend to an economy that is desperate for investments. But it says instead...

You know all those bonds that were issued in the days of high interest rates? Let's buy those instead of lending to new companies. We'll make a fortune!

This old value over new is not new. During Reagan, art auctions for antiques went into record breaking levels. Bush as well. The housing bubble is the same thing. Don't invest in new things, invest in things that are valuable only if the rate of interest is zero. These things are rarely innovative.

The flip side is what happens when the economy is going incredibly? We have the same problem. I have $100B and I want to invest. Well, so do a lot of people. So should I invest in long term progress to build a greater nation, or should I invest in what I know is overvalued commodities that are rising 10X the rate of everything else? If you can get out at the right time, go for the bubble! If you don't, you lost your corner office to the guy that did. Oh and the multi-billion dollar bonus as well.

Finance is a strange beast that should not push the bounds of the market because it serves as a fundamental arm of government. Just like the Army should not try to make a profit (Shudder and think of that outcome), banks should be limited in what they can do to make a profit.

Where's The Wheat?

All over the world food prices are rising causing riots and starvation. The weather is certainly partly responsible, but that is not the real story. It used to be that the rule in commodities was simple, Supply and Demand. Another way to look at this is the stock to consumption ratio. That ratio is not really very high right now. There is enough food and it is getting from where it is grown to where it is eaten, so what gives?

Does it seem to be a recurring theme that wherever the majority of people are suffering, a small part of the population is getting stinking rich from that pain? At a very simple level what is happening right now is that those people that made a fortune in mortgages and then begged for a bailout are now buying up all the food and oil. After all, we all have to eat and these days that also means we all need food shipped to us. So by holding part of the food and part of the oil out of circulation, the price goes up for you and I. It's like there's a millionaire welfare tax on everything.

You might think that these people holding all this up must be spending a fortune on storage costs and losing money on food spoiling. Not really. Food and oil are necessities in the modern world. If the price of food goes up, consumers will pay. If consumers can't pay then governments will subsidize. Speculators know that when it comes time to schedule a ship or a train, the owners will pay any price for the futures. Those owners know they can sell the high priced wheat to the distributor who knows he can pass it on to the stores who pass it on to the customer. The kind of food eaten will change, but not the total calories. (no wheat was harmed in the making of this explanation)

They have also packed these futures into securities that speculators can then buy insurance on. Is this starting to sound familiar? It should, it's the housing market all over again.

Now for the REALLY scary part. There is more money in the world than everything in the world is worth. And, speculators can make more whenever they want. So in theory, speculators can buy everything, wait until our last breath and charge us every penny we have. At that point we are of no value to them and we die. That theory might seem a little harsh and unlikely unless you are a poor family in Bangladesh starving to death because you can't afford the price of food doubling. Then that theoretical life becomes your true reality.

How can this happen? In 2000, at the end of Clinton's presidency, he passed a whole lot of deregulation laws that led to the housing crises we have now. These also deregulated commodities and a whole lot of other things. And who can we thank for this deregulation? The same people who invented many of these new financial instruments, The Koch Brothers!

Yeah, but how does it work? OK, first we have the whole food spoiling thing and the storage. What if what you own is not a pile of wheat, but instead a certificate saying that some wheat is yours somewhere. As long as the wheat keeps moving, but a pile is reserved for you then that wheat will keep getting freshened up with new coming in and old going out. So it is with futures. As the wheat is about to be delivered you sell it and buy another future. Since the original futures traders, the farmers, shippers, and retailers still need the system you will always find a buyer. If the farmers decide to grow more food than is needed and the retailers have a decrease in demand the speculators dump everything and move to another bubble. They lose money, but nothing compared to what they made. The commodities market now has no idea what the real price is or the real supply and demand. It is in chaos and people die.

But this brings up the biggest question. Why do we let this happen? We've conflated capitalism with democracy. All this ranting and raving about "Free Markets" makes us think that our democratic freedom is in danger if we regulate markets. But this is stupid! We have a democracy and yet we have laws. Having laws that reflect our values as a people is what democracies are all about. Pure freedom is called Anarchy. Once we see that we function best when we agree to laws that benefit the majority over the powerful, we return to traditional democracy and the great economic gains that brought us.

Little Pieces Of Paper

I have been troubled by an aspect of this economic crises that seems to be overlooked. Our tool has become our master.

I'm specifically talking about money here. We have become slaves to little pieces of paper that are so useless they can't be eaten, or worn, or keep you dry, but are so valuable you would never even blow your nose with one. This is insane!

As best as I can figure out, this is what happened and why we are here. The US, once upon a time, made things that kept you warm and dry and grew food to eat. But then we realized that other people could do that cheaper, but not better. So we gave them our little pieces of paper so they would do this for us. But with others making all those things, what should we do? After all, sitting around and doing nothing wouldn't get us any more of those little pieces of paper. Then it hit us! All those people buying all that stuff made elsewhere needed little pieces of paper, so we would make that. But, you can't just print up your own copies of little pieces of paper, that would be illegal. And we can't have the government do it, We wouldn't get any profits! And besides, we all know what happened to Germany when they printed little pieces of paper. Inflation went crazy, the cost of everything went through the roof, and the economy collapsed.

But what can we do? What if we create new pieces of paper and sold them? And since nobody with any common sense would give up official little pieces of paper for ones we invent, we'll offer little pieces of paper insurance! This is fool proof! Of course this little piece of paper is worth something. I have another little piece of paper that says it is. Now go out and spend.

So we stopped making stuff and started making little pieces of paper and we were so proud of ourselves we even invented a new name for how clever we had become. We have shifted to a “Service Economy.” And the primary service we provided was lending official pieces of paper in exchange for our home made little pieces of paper and we even, for an additional $19.95, offered a completely different piece of paper telling you how good our invented paper is.

This is where it gets a little funny. Everybody started making just as much stuff as we used to and even more. All so they could have our little pieces of paper. But, once they had all that they didn't know what they should do with them all. Clearly they are too valuable to blow your nose, and they don't keep you warm, and I don't really want to buy those crappy Salad Shooters Americans seem to love. I'll buy those new little pieces of paper! They are all the rage! And so everybody was happy.

Until.

Somebody looked up one day and realized that there was far more homemade little pieces of paper than there were official pieces of paper. But that's OK because I have this other piece of paper saying everything is fine. But it wasn't. The second piece of paper was just as imaginary as the first. So suddenly everybody wanted official pieces of paper so they could pretend these homemade pieces of paper never existed. If I could dump all this worthless paper for some of that official paper then I can pretend I had no part in this Ponzi scheme. But everybody wanted to do the same thing and nobody was accepting these pieces of paper anymore and as useless as official pieces of paper are, these are even more useless. And yet they are still too valuable to use as tissue.

So this new “Service Economy” is playing tug of war with all the official pieces of paper and refusing to let any of it out of their sight. Meanwhile, the suckers in the old “Making Stuff Economy” are demanding little pieces of paper so they can make stuff. See, the financial geniuses convinced everybody that rather than save up or raise money to buy auto parts so you can build a car, they should borrow the money. After all, they'll sell the car in a matter of weeks anyway, so why sit on all that cash when you could be accepting these new homemade pieces of paper. And we will give these pieces of paper to your customers so they can buy that car without saving up either.

So the bankers printed money and speculation went through the roof, and the economy collapsed. All because of a little piece of paper.

Why High Taxes Are Good

...or the invisible hand is senile old drunk.

If you don't know what the invisible hand is, go check wikipedia and I'll wait here.

Done? Good.

I have a friend who has a robot vacuum cleaner. Without his controlling the thing at all, it vacuums his entire living room. How does it work? Some secret AI doing advanced pathing? Careful memory mapping of the room? Stochastic dimensional area-ization formulas? It bounces into a wall and randomly turns. It's dumber than a staggering drunk. And so is the invisible hand. 

Now, if I ran that vacuum long enough, it would vacuum every corner and every square inch of carpet. However, a person could do it with less waste. So how efficient is it? Well, it depends on what is to be measured. If I measure the effort I must put in, the robot is more efficient. If I measure the energy and time used, I am more efficient. If I measure the cost of electricity and what I would have to do to earn that electricity, well, that would depend on my job and wage. 

So, if you love the idea that government does no work and should do no work, then by all means, let the invisible hand vacuum your floor and watch it painfully bouncing into the same wall and turning only to bounce off the same wall again. If you think maximizing time and resources is the most important, then have the workers control the means of production and watch the incredibly efficient production of stuff nobody wants. But, if you are like most of us who really just want the biggest bang for the buck, then it depends on what else could be done with that time and effort.

I'm going to turn things on their heads for a minute and apply economics to the schools of economics. Economics is all about making choices when faced with limited resources. Economics is "the science which studies human behavior as a relationship between ends and scarce means which have alternative uses." 

So economic philosophies attempt to decide what is the “right” way to use scarce resources. Marx believed that profits and rent were improper wastes of scarce resources and only labor should be rewarded. Libertarians think that only the market can decide value and only through complete privatization can a correct value be placed on anything. Others believe that the most efficient method to get goods and services from those who can provide them to those who want them by any means necessary. Keynesian economics believes that markets can only run at peak efficiency through government intervention.  

So now we see the variables at play. Government intervention; Market Freedom; Productive Capacity; Profit; Labor; Rent;

So, if I were a libertarian, I would measure the government intervention and declare success regardless of productive capacity. If I were a Marxist, I would declare victory when rent and profit were zero regardless of productive capacity. If I wanted the most stuff for the least effort, I would declare victory when productive capacity were as high as possible. 

I know some will complain that this is not fair. Both Marxists and Libertarians believe their philosophy does maximize productive capacity. But, my counter argument is that they should then put that at the beginning of the equation and let the rest just happen. But they don't. They have decided an outcome and want to prove they are right. Some solutions favor free markets, some favor communism. Most are both and neither.

Here are some interesting things to think about. They are macroeconomic principles:
There is infinite work to be done.
There is infinite demand for goods and services
There is an infinite potential for productive capacity

If there is infinite work how could there be unemployment? Because the invisible hand is a dottering old fool that wanders around like a robot vacuum only sometimes looking smart and the rest of the time we anthropomorphise the thing to the point we cease to see its flaws. Same answer for questions on the other subjects.

Markets attempt to reach equilibrium. Ok, fine, but they don't do it very well. If I asked you to drive straight down a road then you would drive straight down a road. If the invisible hand drove the car, it would drive straight until it started to swerve off the road and then over correct only to bounce off a passing car in the other lane. Or put another way, economics, like water, always seeks its own level. But, Tsunamis and hurricanes still cause massive disasters. And floods don't go away overnight. 

Does anyone doubt building an interstate highway system would increase a country's productive capacity? How about a court system that protected contracts? How about an energy grid or a rail system? We know that these raise the productive capacity of a country, but the market rarely builds these. Why? Because they benefit the competitor as much as it does them and if they didn't we would have 50 different roads between Chicago and St. Lois. They also require massive spending and in many cases, no clear way to collect money after. Toll roads reduce the benefit of having the road in the first place by forcing drivers to slow down and fumble for change. A partial destruction of the benefit is necessary for the profitability of that road. Now, imagine driving to work where every road is owned by somebody else. They may be in competition with you and simply refuse to allow you to buy passage on their road. 

We have a unique advantage in a democracy that other forms of government do not have. We can collectively decide what should be done and though it is flawed, we often make better decisions this way. If we look at the things we spend our government money on, it goes to what we want it to go to. I know I'd like to see a shuffling of priorities, but the point isn't that I get exactly what I want, but rather I get roughly what I want. I can't afford a tank let alone an Army. I can't send a man to Mars. I can't cure AIDS, but I can vote for my tax dollars to do that. And, the budget becomes a compromise of our collective values. As long as we get rid of this idiotic notion that we will get a better mix in the private sector, we can all be pretty happy with a 10-20% increase in government spending. 

So I can't afford everything that I think will make the country a better place. And neither can Bill Gates, or Warren Buffet, or anyone.

Bill Gates is doing an admirable thing by taking his money and spending it on Africa. That's great, but I think it's a waste of time and money. Africa is a political problem, not a monetary one. Maybe I'm wrong, maybe I'm right, but if it were government money we would debate the merits and then act. By deciding that only the wealthy can decide is to say that only the wealthy know the best course of action, or are not being self serving. If Gates is wrong in Africa, I can't fire him, but if Obama is then I can.

This has always been the downfall of other collectives. Monarchies rely on one person to be really smart. Communism almost guaranteed failure by turning the economy into a committee meeting. Free markets rely on the drunk old invisible hand to bounce perfectly into the right oncoming car and squeak through the right decision. Needless to say this almost never happens.  

When we had high taxation on the wealthy we built dams, roads, nuclear bombs, won a world war, went to the moon, built an interstate highway system, electrified the nation, built a national phone system, built a national trail system.

Now that we have decided that you can spend your money better than the government can we have collapsing bridges, deteriorating rail system, not a single new mile of trails though wilderness usage is way up, no national fiber optic system, an outdated electrical system, a decrepit space program, and a productive capacity that can only sell houses to ourselves using money borrowed from China.

This is not a useful investment in our nations future. This is not the way to be the leader of the free world. This is not the way to be a major player in future technologies. We became a manufacturing superpower by following Alexander Hamilton's “Report on Manufacturers” which advocated strong government involvement in building infrastructure and funding young industries. We created canals and railroads making us the most powerful industrial economy in the world. Despite a devastating Civil War. We then became a military power through massive government seizure of production during WWII. That became a massive technology investment making us the inventor of the new economy. 

Now after 200+ years we have decided that all that stuff government did to get us where we are was no good and we shouldn't pay for it. Government has no role in the market and the market can do this all by itself. But ask this. What has a pharmaceutical company ever cured? Oh sure, they are great at managing a disease for the rest of your life, but a cure? Why do that? How about a space station? Surely there's a market for that? So why isn't there one that is privately funded? How about a weather service? Everyone complains how the weathermen are so bad. There's a clear demand for better weather forecasting and yet all those weathermen get the same data from the same government. How about a super-collider? Or a unifying theory? How about doing the human genome project itself rather than combing data provided by the government.

The truth is the market sucks at pure research. Markets suck at infrastructure. Markets suck at science. Markets suck at exploration. What they are very good at is exploiting what governments pave the way for. Governments paid to discover a trade route to India. The East India Trading Company brilliantly exploited that discovery, but didn't discover anything on its own.

Here's a big one. What do we have that is fundamentally different than we had in 1958? What major, life disrupting invention have we come up with in the last 50 years? Sure, we've made computers better, jets better, rockets better, cooler TVs, better ways to distribute movies. Now, compare that to 1908 - 1958. We got the Airplane to the jet airplane to rockets. Steam engines to diesel electric. Rural electrification. Sewage systems. Water systems. End of the horse as primary transportation. Nationwide phone system. Helicopters. A cure for Polio. Blood typing. We went from the world of Malthus to the world of Galbraith. A world of barely surviving to a world a affluence. 

This was done with government money spent on things that we the people thought reflected our values and desires for the future. 

It's said that there are three ways to order and organize the means of production, and I'm not talking Marx just because I use that term. 
Central Planning
Free Markets
Mix The Two.

Well, I don't think I have to convince anyone that Central Planning has problems. In a way I am trying to show that might not actually be the case, but let me continue. Free markets? Well, I think they suck, but similar to Democracy, it's the worst except for all the others. But what about a mix?

The problem with central planning takes root in another notion of economics. It's the question of value. If I want something really badly that costs $100 and I buy it. It may be worth $1000 in my happiness. A $20 life jacket is worth every amount of money to a drowning man. But, a glass of water is worthless. And that's what happens with Central planning. Too often the life jackets, or Louisiana's amphibious vehicles, go to the desert and the water goes to the flood victims. This is when we all laugh at government and say what a lousy job government does.

OK, so the free market would never do something so stupid. It would never sell dog food or lumber over the Internet. It would never overvalue homes to offer bad loans at the height of a housing bubble. Nor would it ever use heavily leveraged mortgage money to jack up the price of oil futures. I think you get my point.

Here's where Democracy makes a big difference. Political pressure made Brownie lose his job. The same is not happening on Wall Street. When a Democracy does something stupid, the voters get a chance to correct it. If the government does not respond to our values, then we vote for those who do. We don't get to vote on Wal-mart building a new highway to the massive store they just built. They expect us to build it for them. And that's fine, because then we get to decide if that's the best thing for our town. Maybe we want Wal-mart to be a little difficult to get to. Maybe we don't, but that's a debate we get to have.

But what about voting with your dollars? Well, that means Paris Hilton gets more votes than you, but her vote can have a massive impact on you. Let's say she wants to build a perfume factory next door to your house. Well, if you don't like it, don't buy her perfume! That will show her!

The point of all of this is look at what government can do and has done. Look at our values and compare it to the values of our government. If you don't like those values, try to change them. But, government spending is not the enemy. People telling you it's the enemy while they spend like crazy on things that don't reflect our values are the enemy. They want us to debate low taxes and evil government spending rather than looking at what they do with our money. And my favorite is when we catch them doing it, they say “see! Government spending is evil! I just proved it!”

Tell the Europeans the Marshal Plan was evil.

Spoon Full of Sugar

With a collapse of the financial market, why on earth would I care a fig about inflation? After all, aren't we in a period of massive deflation? 

Yes, we are. But as I posted earlier, deflation is easy to fix. And it can be fun. Inflation is like stopping a boom. It's unpleasant and nobody will be your friend after it's done. Just ask Carter. 

Here's a proposal. 

In order to end deflation, we have to print and spend a lot of money. We will get schools, roads, bridges, parks, all the great stuff that came out of the depression. But, we may end up with too much money and that would require a massive hike in interest rates, the very rates that are near zero now and not doing anybody any good. Unless Germany and Japan can kindly go to war with us again so we can soak up that extra cash and capacity, we will face a very painful time as we return to normal economic policies. 

I know I said there was a proposal, but hear this all out first. Why not just not print that much money in the first place? Well, the problem here is that you need to actually cause inflation and it has to be believed by everyone, especially bankers. If I have $1000 at 0% interest and pay back $1000 at the end of the year, the lender has made no money. If I borrow at 10% interest then the bank makes $100. But, if inflation is at 10%, the bank has the same equivalence of money as before. So, why should a bank want inflation? Because the bank can leverage that to a better advantage. If the bank borrows at 0% and you borrow at 5% then you pay back $50 more than you borrowed. The bank is sure you will pay it back because money in the future will be easier, not harder to get. The bank pays back $1000 and gets to keep its risk free $50. The bank is borrowing at -10% interest and you are borrowing at -5%. In other words, the Feds are paying you to borrow money. 

Now the bank only needs $100 to lend you $1000. I know, it's called fractional reserve banking and it's very weird and I personally think it is the basis for most of our economic problems throughout the last two centuries, but that is how it works. Anyway, They are in effect making 50% profit from that 5% loan. The reason they won't make the loan now is that the expectation is that deflation is running about 5% now. That means that $1000 loan that needs to be paid back at $1100 is going to cost the borrower $1155 in todays dollars. For many, that is just too much and the bank has to foreclose and cough up that money itself. So a bank loans $1000 on $100 and makes $100 or loans $1000 on $100 and loses $1155. That's an upside of +100% or a downside of -1,155% or more than 10 times the loss as there is for the gain. So the banker has to know that there will be inflation and the borrower will be able to repay the loan or at the very least, the house will be worth more in the future. 

Plus, the bank has to fold deflation into the loan so the interest rate is out of reach for many people. If I borrow $1000 at 0% and hold on for a year at -5% inflation, then I made $50 for doing nothing. If I put that in a T-bill at 2% then I make 7%. That's a nice amount of money for doing nothing! If I loan it, I'd need 12-15% to make that kind of risk/return. 

Really, the proposal

So here's the idea. What if we raise interest rates to about 5% over the next year while at the same time print lots of money? I know it sounds like it's self defeating, but here's the beauty of the idea. The hard times come during the good times and all that is needed when we are recovered is to ease off the good times. It's like deciding ahead of time who will be the designated driver. In this case, it will be the banks. Yes, those same people who got us into this in the first place. But here we are asking them to do what they are good at. They are good at being party-poopers. In fact, they are so good at it that they are preventing us from having a party right now which is why the Feds have to throw us a party instead. 

So, the Feds become the bank while the banks wring their hands and worry about their balance sheets. Eventually they will see that with inflation making loans less risky and the negative numbers on the balance sheet start looking smaller due to inflation and the T-bills starting to look less and less desirable, they will start to loan money again. 

When the designated driver looks ready to have a drink, we know it's time to end the party and go home. The banks take over more and more of their proper role in the economy and the feds do less and less. The rate is now in a position that it functions again both directions and we can return to our normal insanity. 

I believe this will prolong the time the government has to stimulate the economy, but I don't think it will prolong the overall time the Feds will have to intervene in drastic ways. I just think it will let them intervene completely on the stimulus side, and not at all on the politically disastrous kill the party side. So no politician has to face the issue of do the right thing, but commit political suicide. There is a big implication of trade and flight from the dollar, but I may mull those over in a future posts.

Every thing's Just Fine

This current economic mess is a pretty simple problem to get out of. There is no chance we will do the right thing to fix it though because too many people have the wrong idea about why we have an economy at all, or even money. Understanding that is the key to understanding or current mess and the obvious solutions.

Some Basics

OK, so the first thing to realize is that we did not get invaded or bombed or hit peak oil or had a catastrophic ecological disaster, yet. So our problem is a wholly man made problem and, as opposed to an oil spill or industrial accident, wholly one in a fictitious world. 

Let me back up a minute to say something that will shock many people. Economics is no more real than the rules to baseball or Texas Holdem. I know, I know. The economy is how our world functions, the “Invisible Hand,” communism doesn't work, blah, blah, blah. The “The Tortoise And The Hare” is also fiction. It doesn't mean it's not useful, it just means that it's fictional. There is no theory of gravity equivalent in economics just like there is no formula for winning a football game. And there lies the solution to this whole mess.

Just go with me for a while that economics is just a bunch of made up rules to a game we all agree to play. First, what is real in this game? In soccer, the players are real, the ball is real, the field is real, but the rules are fantasy. In economics, production capacity is real, workers are real, consumer goods are real. What is not real? Money, loans, bonds, stocks, inflation, these are all by-products of the game. Just like offsides, holding, pass interference are by-products of the rules to American Football. 

Why Won't We Fix This?

So, like I said earlier. Nothing fundamentally has changed. Everything is still there. Factories are still there. Workers are still alive. Consumers still want stuff. So what's the big deal? The big deal is money. Who has it, who can get it, and who controls it. This is the focus everyone is so fixated on. The real question is what do we want and how do we get it. Money is only a tool to facilitate the production and distribution of goods and services. Money itself is pointless. You can't eat it. You can't drive it to work. You can't wear it, though I know someone who would try. So it's just pointless pieces of paper. It used to represent gold, but that's even dumber. Suddenly finding a ton of gold does not increase production and so does nothing to actual wealth. Losing a ton of gold does not reduce the production. Right now we have lost a ton of gold and have shut down the economy while we all scramble around looking for it. It's the most insane thing I could imagine doing. The house is on fire and we are throwing money on the fire thinking that since money can buy water it's the same as throwing water on the fire!

We are so afraid of inflation and debt we are letting real things stop making real things. My dad has bought into one of the right wing talking points, and I don't blame him. It goes like this. We are in this mess because U.S. consumers went too deep into debt to try to fund a lifestyle beyond their means. OK, but my response is this, It couldn't have been beyond their means because we could make the stuff. So, forget about money for a minute. If we have the productive capacity to make all this stuff, then it is not beyond anyones means to have it. Imagine this, because it really happened during the Great Depression. Farmers have fields full of produce and people are starving in the city because of lack of money. Does this scenario make any sense? It does if the prime importance is a little slip of paper, but it's nonsense if it is your child dieing in your arms. To say that the parents are to blame for having kids they could not feed is not only callous, but incredibly stupid. The food is there. The work was done. Somebodies idiotic fiscal policy drove all the slips of paper away. That is why the child is starving to death.

So Where Did All The Money Go?

Here's the biggest secret to this whole mess. The money that disappeared never existed in the first place. When you ask the bank for a loan, it hands you a check to go against whatever you are going to buy. That check, if you or I wrote it, would bounce higher than the moon. It is written on nothing! As our productive capacity increases, and our population, we need more and more money to keep the economy running. The US in its infinite stupidity decided that the best place to get money is for everyone to borrow it. The more money borrowed, the more money in circulation, the more goods and services produced, and consumed, and workers get paid not quite enough to pay for all this. Through the brilliance of trickle down economics, the workers go deeper into debt to those who don't need any more money, but who's money rests solely on the workers being able to borrow and spend more every year. It's just an elaborate version of the old sharecropper scheme. 

When the consumer can no longer borrow more or repay what they have borrowed, they get punished even though the economy rested on this very thing happening. If the consumer had gotten wise and been more prudent, this same scenario would have played out, but the complaint would have been consumer hording, which is exactly what happened and exactly the accusation hurled in Japan. The problem in both is the same and the solution in both is the same.

One more point about trickle down economics. In my previous post I pointed out that a boom is too many investment dollars chasing too few investment opportunities, the investment equivalent of inflation. When the wealth is concentrated so much as it is now, it is inevitable that we will have a huge series of bubbles. One bubble just replaces another as stocks of the 90s became housing became oil futures until everything collapses and that string of clever deals unravels and nothing was based on nothing was based on nothing. Now we are in a crises, not because of the plight of the workers, but because of the plight of the wealthy. 

So, Einstein, How Do We Fix It?

Print more money!

Every year we grow our production capacity. Every year we grow in population. Every year we need more money. Our national debt grows to cover projects that are getting done and work we think is important. Our trade deficit grows for all the new demand of goods and services that are being done. It's time to see money for what it really is, a tool. If we need more of it, just print the stuff. We did this with colonial script and with the green back. The LETS system is a variant of the idea. Take the idea of borrowing out of the monetary surplus equation. 

But we can't do that! After all, this system has been around for about 100 years and we've only had one, and now maybe two, great depressions, recessions every half dozen years, bank failures, S&L failures, wall street failures, booms, busts, stagflation, inflation, gold speculation, and it's working just fine. Printing money would be just like Weimar Germany!

No it wouldn't. Weimar Germany printed money to get out of the obligations of the treaty of Versailles. It was not done as a gesture of being a good steward of the economy. Spain endured inflations and recessions after the new gold and silver from the new world ravaged their economy. Rome experienced booms and busts based on foreign conquests. Britain rose and fell through colonial exploitation and the economic upheavals caused by that. Every banking disaster of the last and this century has occurred at the end of low taxes for the wealthy producing a housing bubble. Being helpless in the face of a nations monetary base hasn't worked. It is time for us to take direct control of our monetary reserves. Trickle down economics is much more like Weimar Germany than taking our own control of the monetary base. Trickle down economics allows the printing of free money by those with the power to do so. Issuing new stocks, new lines of credit, new mortgages, are all methods of printing more money, and more money is clearly needed. That is how we grow. However, this form of creating currency comes at too high a cost. We are in effect renting our circulating capital from private enterprises. 

Our economy was doing OK, though pretty lethargic at previous levels of money. Let's print what we lost and call it even.