Lies, Damn Lies, and Statistics

You hear a stat, it sounds convincing, you form your opinion or you confirm that your belief is true.  Unfortunately stats from groups with an agenda, whether unintended or on purpose, are usually wrong.

My favorite example is when an elderly woman spilled McDonald’s coffee on herself and sued McDonalds because their coffee was too hot to be safe.  One of McDonald’s responses was to conduct a survey of its customers to prove that their coffee was not too hot.  In this case WHO they surveyed was the problem.  For example, I had purchased McDonald’s coffee in the past and found it to be too hot.  I had to pour out half the cup, then try to fill it with the tiny half-and-half cuplets, and then still had to wait 30 minutes before it was safe to drink without burning my tongue.  So I was a former customer, not a current McDonald’s coffee drinker.  McDonalds only surveyed people who were still drinking McDonald’s coffee.  Of course they didn’t think it was too hot, otherwise they would have quit drinking it like me.

WHAT questions you ask is a trick that can be used to get the results you want.  The comment here, from someone who was recently called for a survey, is a real world anecdote of how this is done.  As you can see the questions leave on one answer that doesn’t help the surveyors get the answer they want, so they follow-up that question with more and more skewed questions until this particular person decided to opt out of the survey – thus cancelling the answer that didn’t agree with the outcome the surveyors wanted, and anyone who kept answering would give them the answers they want.

The moral of the story is that any “proof” that something is true needs to be taken with a grain of salt until you review how the “proof” was derived.

Another example that irks me is from the book Freakonomics.   They found a stat that showed that Realtors sell their own homes for 3% more than their own clients.  This is a case of a stat more than likely being true.  But the conclusions drawn here is the problem.  No further study is done, the Freakonomics authors conduct one interview and conclude that Realtors don’t care whether or not their clients earn an extra $10,000 (on a $300,000 home) because they only make a few percentage points in commission on that extra $10,000.

I’m a Realtor and I can propose all kinds of other reasons why Realtors may sell their homes for 3% more than their clients, and these reasons would require study before anyone could jump to the kind of conclusions that the Freakonomics authors jumped to.  Interestingly, if I were to use the Freakonomics logic on them I could easily “prove” that they purposely did no research on this topic, and purposely lied in order to sell books.  After all, their incentive to tell the truth when Realtors are one of the least trusted professions is nil, and their incentive to sell books with shocking conclusions is extremely high.  So they lied because it would make them money, and because it takes no effort or money to just form a conclusion with no extra study.

The reasons Realtors might sell their homes for 3% more are many.  For one, we Realtors know that spending money on staging, uncluttering and cleaning up pays for itself and then some.  It might cost you $5,000 to stage your home, and in the $300,000 home example you sell it for $10,000 more.  I’d argue Staging as an even bigger ROI than that, but you get the point.

As a Realtor my clients complain about all of the showings and open houses we require to properly expose the home.  Cleaning up constantly is a pain.  Many have thrown up their hands and taken the first offer because they couldn’t take it anymore – this has happened to me as early as one week into the process, and by one month nearly every Seller is fed up and done.  I sold my own home, and it was a royal pain, but I did it because I took my own advice – stick it out, keep cleaning, deal with people tracking dirt through, and putting me and my family out of the house on a regular basis.

One reason that doesn’t make sense to most sellers is that starting with a price that is too high actually costs you more money.  A home that sits on the market for a long time and goes through lots of price drops almost invariably sells for less than it would have if priced correctly from the start.  And it is rare to meet a Seller who doesn’t believe their home isn’t worth more than the exact same home right next door to them.  Add on to of that a Seller who won’t stage, or uncluttered, or paint, or garden, or make the home fully available for showings, and you have a recipe for selling your home for less than a Realtor who prices right, and does all of the upfront work.

The moral of the story is to not trust stats unless you look into it.  The one that is currently driving me up a wall is the idea that the rich are being unfairly taxed because they are paying a larger total share of all taxes than ever before.  On the face of it you think “gee, maybe we should lower tax rates on the rich”.  But the reality is they are paying more in taxes because they are making a LOT more into total income, and have gained a LOT more in total share of all wealth.  What’s more, an entire class of tax payer has been wiped out because they don’t have jobs any more.  So simple math “proves” that the rich pay too much in taxes.  But equally simple math “proves” that they aren’t paying enough.

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Fiat is bad, gold is good. Or is it

It pains me to see Austrian economic followers repeating the same tired arguments over and over.  Now they are trying to get in on Occupy Wall Street as evidenced by tons of comments on every article I’ve read, and quite a few youtube videos.  I realize they think they have an answer to our financial problems, and they largely want to help, but their solutions are unrealistic, and misguided.

If you’ve never read Mises or any Austrian economic literature, I’ll summarize some of its basic beliefs.  They believe gold is money, and fiat (paper currency backed by nothing other than “faith”) is not.  They go on long-winded tangents about how gold has been money since the dawn of time, as if that means something.

They all claim that because a government can print money out of thin air with no tie to a physical good like gold, it means that the government will inevitably print too much and it will result in a hyperinflation.

They also argue that any inflation is bad because it is the government’s secret way of stealing from you.

Arguing with an Austrian believer is like arguing with someone who believes they’ve been abducted by aliens.  You can’t convince them otherwise, so there is no point in arguing with them.  It is like trying to convince an Evangelical Christian to become a Muslin, or a Muslim to become an Evangelical Christian.  Sure, someone might convert, but when you “know” you are right because of your Book, few will even bother to read the other guy’s book, let alone agree.

But for you non-Austrians who just want to make sense of our economy, and what can be done to fix it, here is a primer to help you not fall into the Mises spell (a spell I was at least partially under for a couple of months while I read their literature, and hoped there were actual solutions).

First, all money is faith-based.  So gold is fiat too.  It requires faith by the people that it is money.  Plus, if gold could suddenly be produced chemically to perfection, than gold would have the same issue that paper money has – an unlimited supply just by creating it.

An Austrian states that gold is money simply because gold has been used as money for centuries.  But who cares.  People ate with their hands for centuries.  With forks and knives we’ve found a better way.  Just because forks and knives have also been used to hurt others doesn’t make the fork or the knife the problem.  Used properly they are superior to eating with your hands.

The argument that because a government can print money out of thin air means they will print so much that we will eventually have a hyperinflation.  That is like saying if you go to a wedding with an open bar you will get so drunk you will throw up on the bride.  Or that if you go to enough weddings with open bars it is inevitable that you will eventually get drunk and throw up on one of the brides.  The truth – some won’t drink any alcohol even though it is free.  Others will drink in moderation.  Someone might start to get really drunk, but changes are others who don’t want the wedding to be ruined will cut off the drinker and/or escort him out.  Just because you can get drunk, doesn’t mean you will.  Just because the government can print money doesn’t mean it will puke on the country.

The more complex counter argument to the hyperinflation worry is that the government can and should print money in relation to the needs and productivity of the private sector.  And this is why gold standard economies always end and move to pure fiat systems.  As a population grows, and as they save, there is a greater and greater need for more and more money.  If only gold is money then either more gold has to be dug up from the ground, or it has to be debased.

Of course everyone knows the US population has grown MUCH larger over time, the private sector has saved a ton of money, and we have become more productive and wealthier as a nation (also counter to Austrians who somehow think our standard of living is lower now than when we were on the gold standard – so false as to be laughable).  With so much growth and savings, we REQUIRED more money be spent into existence by the government.  And instead of continually debasing money vs. gold we simply left the gold standard in 1971 via the “Nixon Shock”.  It was inevitable.  It was going to happen sooner or later.  It does to every gold standard economy that grows.  Funny that Austrians say all fiat’s eventually collapse, but never grasp that all gold standard economies eventually move off of gold.

What about the inflation is bad for you argument?  First, they misunderstand inflation and they misunderstand inflationary pressures.  They think the Fed doing QE is “printing money”.  Well, I can’t blame them because most people misunderstand Fed operations like QE, what real money “printing” is.  But I digress….. the worst kind of inflation is when your standard of living goes down.  They argue that a loaf of bread used to be 5 cents, and now it is 5 dollars.  Proof that inflation is stealing from people.  Except our wages went up too, and more people have wages, and more people have internet, flat screen TV’s, iPads, access to all kinds of public works like schools, libraries, cleaner water, cleaner air to breath, etc.  If our standard of living had not improved in the last 100 years many of us would be living with candle light, no TV’s, no computers or internet. You may argue these things don’t make life better (then why are you reading this or anything else on the web?) but then you can simply not spend any money on any of those things.  Give back your refrigerator.  Only ride a bike.  And what you will find is that your tiny wage goes a LOT further than it does now.  All of a sudden the median income of $50,000 or so makes you rich because you can save to your heart’s content.

The fact is that we have better medical care – even those of us who don’t have health benefits because 100 years ago you also would not have had health care, going to a doctor would have been expensive, and they might have bled you if you were sick and didn’t know what else to do.

The argument that inflation is killing us is nonsense when you consider that our standard of living is significantly better than it used to be in almost any way you measure it.  Our drinking water is cleaner, our environment is cleaner, we can travel further distances faster, cheaper and more safely.  And on and on.

Second, the idea that the government is stealing from the population via inflation is nothing but conspiracy theory nonsense.  The government is SPENDING money into the economy via deficits and the so-called “debt”.  It might cause inflation by spending too much money in.  But then there is more money to pay for the higher priced goods.  And right now, we are in a deflationary period.  And if inflation is so bad, then deflation must be good – except it isn’t, and that is how we are all getting poorer.  Goods are become cheaper, but your wages are going down, and as people try to save due to deflation the economy contracts and more and more people lose jobs.  If the government wanted to steal from the people they would do it via deflation, not inflation.

Finally, an Austrian believes a Federal government should either be non-existent, or tiny.  Let the States run themselves.  Except it was a miracle we won the Revolutionary War because we were just a bunch of individual States with individual militias.  We need a large government because we are a large country.  If we wanted a small government and individual States than there are plenty of options around the world where you can go live.  And most of them do not enjoy the opportunities we have in the U.S., and don’t have the standard of living we have in the U.S.  The dream of Austrian libertarians is one where your gun, and your gold is all you need.  Me?  I’d rather live in a large cooperative society where I can carry paper money and trust the police and the military to carry the guns.  I’ll arm myself if there is tyranny, but there isn’t, there is just inept government and a populace who let them be inept – until now, I hope.  If the government screws up, like it has been doing lately, then we take to the streets, vote the bums out, and fix the system.  But fiat doesn’t need to be fixed. Money in politics does.  If we suddenly went on the gold standard, they’d just pay politicians in gold and exert the same kind of economic pain on the rest of us.  Fiat isn’t the problem and gold isn’t the solution.

Finally, Austrians keep saying hyperinflation is just around the corner.  But time again nothing happens.  The reason for the resurgence in Austrian thinking is because they rightly predicted that household debt and the housing bubble were problems.  Austrians understand that private sector debt is a problem.  Keynesian’s don’t get that (they seem to be getting that now, but that is how Greenspan and Bernanke missed the housing bubble until too late).  But Austrian’s mistakenly think Government debt is the same thing as private sector debt.  They aren’t.  Keynesian’s know public sector debt is different, so despite the fact that Keynesians missed the brewing problem, they actually know how to fix it.  Austrians predicted the problem, but don’t know how to fix it now that it is here.  Only MMT understood and understands both, predicted the global financial crisis AND knows how to fix the economy.  MMT understands the that public and private sector debt are not the same thing.  Austrians think both are a problem.  Keynesians seem to think neither is a problem.  MMT knows private sector debt can be a problem, but that a fiat currency country that can print new money whenever it wants isn’t actual ever in debt because it does not borrow to spend.

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How a simple idea could help Occupy Wall Street change everything

Occupy Wall Street has the passion, the numbers, and is squarely focused on the right villains.  The question is can they come up with real-world, workable solutions to our country’s financial problems.

To that end this article shines a spotlight on some economic myths, that if the masses grasp, they could transform the country.  These simple, but little understood ideas, should become a rallying cry for OccupyWallStreet because right now the 1% are using several widely accepted myths to transfer wealth from the 99%.

The “debt” myth
First we must overturn the idea that the U.S. is saddled with too much “debt” and is nearly insolvent or bankrupt.  With this firmly embedded in our culture it is understandable, and almost acceptable, to have very high unemployment, or a large segment of the population who are broke themselves.  Because of the imaginary “debt” problem everyone advocates cutting back spending, or raising taxes, both of which would result in even more financial strain on the 99%.

The truth is the U.S. is the richest country in the world BY FAR.  With one-quarter the population of China, our economy is nearly 3 times larger than theirs.  We are so rich as a country that there is no reason why most of us can’t prosper, while we also provide social safety nets for those down on their luck, or disabled.  The question isn’t “if” we can fix things, and “if” we have enough money, it is “how” to fix things because we do have enough money, productivity, resources, ingenuity, drive, and imagination.  But if you think the US is broke, you can more easily be scammed into doing ridiculous things like giving the rich tax breaks while raising taxes on the poor and middle class.  Or giving corporations subsidies (corporate welfare) while eliminating social welfare like medicare or unemployment benefits.  Heck, someone has to pay if we’re broke – right?

But we are not broke as a nation.  The lie that we are in “debt” as a nation needs to be understood by the 99% before any real change can happen.  Otherwise Occupy Wall Street is likely to go down an errant path similar to the Tea Party, where the answer is to “tighten our belts”.

If I were a conspiracy theorist I would say the top 1% purposely created the “debt myth”  in order to convince the 99% that there isn’t enough money to go around.  If we believe that than many will agree that we can’t fund things like Social Security and health care.  Plus, if the government is broke, then it is clear they mismanage money and we should give all resources and tax breaks to the wealthy and businesses because, since they aren’t broke, they are the only ones we can trust with the money.

I’m not a conspiracy theorist so I choose to believe that most in the top 1% also believe the myth that the country has a major “debt” that needs to be paid back, and we are quickly going broke.  This myth is repeated by the media, by our politicians, and by ourselves so much that we all just assume it to be true.  However, the truth is that the so-called “debt” is a misnomer.  It is the wrong name because it is not debt.  It is nothing like your debt, or my debt, or even a business’ debt.

A simplistic way to understand this truth is to realize that if there was no US Federal Government “debt”, there would be no US dollars in circulation.  Think about that – there was a day #1 of the US dollar being printed and distributed.  If we “balanced our checkbook” at the end of that year by taxing out what the government spent in, there would be no dollars in circulation.  More on this concept here, here and here.

The “debt” is simply the total US deficit spending since inception.  As I describe here, when a population grows, and gets more productive, and when more people save (especially today when the wealthy and corporations are sitting on huge piles of cash), the more the government must pump money into the economy to allow the populace to have something to transact in.  So “debt” is spending.  It is the spending that must happen when the private sector is growing and saving.  And when that government can just print money out of thin air, it does, and it doesn’t need to be paid back.  After all, who is going to pay them back?  Those who are saving?  Those who are expecting a wage for their work?  Well, we do tax everyone, but you can’t tax 100% of the money that is spent in, otherwise there is no money in circulation.  Why on earth we call spending “debt” is beyond me (well, I know it is a relic of our gold standard origins, but that’s another story).

So the U.S. “debt” is nothing at all like household debt.  The government should not “balance their checkbook”.  Your debt, my debt and all private sector debts are completely different from what we currently call U.S. Federal government “debt” when it is simply “spending”.  You and I have to pay our loans off unless of course we have an unlimited earning capacity or a printing press.  The government does have a printing press, and is backed by the world’s largest and most productive economy that desires to save those dollars effectively removing them from circulation, and has grown exponentially in their need and use of dollars thanks to population growth and productivity growth.

Once you understand this concept, you realize that the “debt” will never be paid back, nor should it ever be paid back?  Paying it back means taxing it out of the system.  That is a horrendous idea.  Surpluses are taxing more out of the system than the government spends in.  This is a bad idea unless you want to contract the economy.  So “debt” or deficits puts money into the economy.  Balanced budgets take out 100% of what is spent in.  And “surpluses” take it out more than what is spent in.  Republicans, who claim not to like big government, should hate surpluses. Surpluses are the government taking more money from the private sector than it spends in.  But obviously they don’t get this point.

Can you imagine what Occupy Wall Street could do with the knowledge that we NEED government spending right now?  Instead of misguided “debt ceiling” debates, and jobs killing austerity measures, we would be talking about what the money should be spent on.  Instead of Obama saying “I have a jobs bill, and here is how we are going to pay for it” he could say “I have a jobs bill that is 100% spending and tax CUTS.”  The ONLY reason to raise taxes in a down economy is if you want fairness in the tax system – in which case you raise taxes on the rich, and lower them on everyone else.

China funds the U.S. myth
The China “funds” U.S. spending myth, and that we are in debt to them.  Another nonsense economic myth.  The truth is we fund them.  The U.S. economy is nearly 3 times larger than China’s economy.  They rely on us.  They sell us cheap goods, and we pay them in US dollars.  That keeps their factories humming, and people employed in China.  The Chinese turn around and invest their US dollars in treasuries.  This investment is akin to you or I taking our money and putting it into our local bank in a savings account.  So is our bank now in “debt”?  If we start with $10,000 in deposits in our bank is our bank $10,000 worse off than they were before?   How about if we sell so many goods that we have $1 trillion, or $10 trillion dollars to put into that same savings account, is the bank now nearing insolvency, and quickly going broke?  Of course not.

These two lies – that we have a huge “debt”, and that China is funding us, are upside down thinking.  They are myths.  Once turned right side up, we as a country can actually start to propose solutions to our economic problems.  We aren’t broke – we have simply misallocated resources.  We don’t have to cut back, we simply need to spend wisely.  We don’t have to raise taxes, we need fairness in the tax system.

If Occupy Wall Street builds a foundation on accurate beliefs of the U.S. financial system – a system that is 3x larger than the 2nd largest economy despite one-quarter of the population – we’ll realize we are a rich country and we don’t need to leave anyone behind.  We don’t need to raise taxes on the middle class.

Social Security unfunded and/or Ponzi myth
Once you understand that we are not in debt trouble, and the Chinese don’t fund us, you begin to unravel other myths, like Social Security being a Ponzi scheme, or that is an “unfunded liability”.  The reason all of these are myths, and not true is because a) the U.S. government can print money any time it wants, and b) the trust and faith in the US dollar is backed by the largest most productive economy in the world.  So we CAN print money to fund things.  In fact, in a technical sense that is exactly what the government does for 100% of its spending.  Most believe that taxes are used to pay for government spending.  But that is also not true.  First came government spending, taxes came later.  This is always true.  The government could simply spend a lot less, and then tax nothing.  The reason for taxes is to force the population to want and need to earn US dollars so that it becomes reliant on it, which gives a fiat currency the “faith” it requires to exist.  (There is plenty on the web about this idea.  All of these concepts are part of an economic description of our current monetary system called MMT.  It is a little understood brand of economic thinking, but is the most accurate.)

Isn’t it funny how the military never runs out of money, but everyone says that Social Security is going to run out of money?  Both have the same funding source, except that we pay a Social Security tax which was just a clever ploy by FDR to keep Congress from ever being able to take it away from us.  In other words, if you and I paid a Social Security tax, we will both demand we get that money paid back to us when we retire.  The government can always fund it, and thanks to FDR’s clever move, they always will.

This article is a very general primer on a very complex subject.  Many will challenge these ideas, but they are all backed by economic science.  A science that predicted we would have a financial crisis like the one we just had back in 1973, while the so-called experts like Alan Greenspan and Ben Bernanke didn’t see it when it was right under their noses because their economic science is flawed.

The bottom line – we are an incredibly rich country, but the 1% have used economic myths to enrich themselves at the expense of the 99% without most of us noticing it until there was 20% underemployment, a financial crisis, and a massive housing bubble.  Let’s hope OccupyWallStreet can help get the country back on the right track by grasping the economic truths, and overcoming our economic myths.

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Science debunked again – prostate cancer screening

You trust science and scientists, after all, they do a tremendous amount of research before publishing opinions.  Unfortunately scientific myth after scientific myth gets over turned.  Now it is the benefits of early screening for prostate cancer per this article.

To be sure this is still an open debate.  But if early screening does more harm than good, this will be yet another in a long line of recommendations the public has latched onto, only to find out the research was wrong.  For example, butter was bad, so margarine was created.  I’m not sure how we got onto the bottled milk kick for babies, but it is clear now that breast milk is far more beneficial than “scientific” milk.  The food pyramid I grew up with has been discredited.  Heck, maybe this is just science of the 60’s that is being discredited.  Isn’t that the era that had ads that said “two out of three doctors recommend Camel cigarettes”?

Back to prostate cancer, the article states “About 1 in 6 U.S. men will be diagnosed with prostate cancer at some point in their life. Yet the cancer society notes that in Western European countries where screening isn’t common, 1 in 10 men are diagnosed and the risk of death in both places is the same.” In other words 40% get a huge scare and no apparent benefit.

And why not screen anyway? Per the article “…30 percent of men who are treated for PSA-discovered prostate cancer suffer significant side effects from the resulting treatment.”

I can’t find it, but I’m pretty sure I read elsewhere of genome or DNA screening for your likelihood of getting certain kinds of diseases. And what I thought I understood from that is they could tell if you would get a bad kind of prostate cancer vs. one that wasn’t bad. The article cited here seems to say that technology doesn’t exist, so maybe I read about something they believe is down the line.  But what I took from that article was that we are treating cancers that are not likely to kill you with measures that practically do kill you.

The way I grew up was to avoid doctor’s visits at all costs. That included my grandmother who lived until 101.  They say visits to hospitals can cause you to become ill or die when you would not have otherwise. For example, they only recently learned that doctor’s ties carried a tremendous amount of germs from one patient to the next.  Duh.  And in recent years many people have become concerned that shots cause autism.  The jury is out on that, but much of the science say it isn’t true.  But that’s the point of this article – when can you trust the science when so much gets over turned?

So for me, I’ve got 4 years before the recommended age 50 for prostate and colon cancer screening, and I’ll be keeping an eye on the research before I go in for any screening.  Here’s hoping there is some serious advancement along the lines of what I thought I had read over the next 4 years.

RIP Steve Jobs.  iSad for him.  Let’s hope science speeds up and improves its accuracy.

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Taking Occupy Wall Street seriously

The big money Right and talking heads on CNBC and Fox, and even much of the mainstream media, have derisively covered the Occupy Wall Street protests, even calling them unAmerican, when these same bubble heads called Tea Party protests patriotic.

The criticism that seems to be sticking even with those who claim support for Occupy Wall Street is that they have no solutions, and their complaints are all over the place.  This, in my opinion, should not be a critique because it is exactly what an early uprising looks like.  For example, the real Boston Tea Party happened in 1773, and per Wikipedia  it “was the culmination of a resistance movement….”. The Declaration of Independence didn’t occur until nearly 3 years later in 1776, and the culmination of the protestors (Revolutionaries) didn’t occur until the Constitution was ratified in 1788.

Since it took years for the American Revolutionaries to come together with a cohesive plan other than to first stop unfair taxes, second get the British out, and third to have a well thought out doctrine, what are we supposed to expect of Occupy Wall Street after a few weeks of protests?

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How you owe China, B

Myths we all believe in – “how you owe China B” and “how do I got to balance my checkbook and you don’t?”

Everyone seems to “like” this video on Facebook. My response: I “don’t like” because this perpetuates economic myths that we all know don’t sound right, but can’t quite put our finger on it. For example, how is it that the US is broke? Or that China funds our spending? We still out manufacturer the Chinese despite having a quarter of their population – and they’re the powerhouse???? They sell us cheap goods – and in return they get US dollars. Doesn’t that mean we fund them????

The idea that we owe China is because they have collected trillions in US dollars via their trade surplus with us, and they turn around and invest those dollars in treasuries. For some bizarre reason we call that “debt”. But is it debt? How is that us owing them when we gave them the money in the first place? It is more akin to you putting your cash into a savings account at your bank. Is the bank in big trouble now because they are in debt to you? The more of your cash you give them, the more they are going broke and likely to fail?????

Next on the myth busting bus – that the US has to “balance your checkbook B”.  The US can not and should not balance its budget.  Without deficits there would be no money in the economy.  Think about that for one second before you throw this comment out with the bathwater……. on day #1 of the US printing dollars – the very first greenbacks.  There were no US dollars in existence.  So they decide on the US dollar and for anyone to start transacting in it they had to get money into the economy.  How?  Well, maybe pay someone to build some roads, pay for a military or schools and libraries, or all of the above.  Now if you want to balance the budget – you just tax all of that money right back out.  And your balanced budget results in ZERO money in the economy.   Yes there can be malinvestment, waste, fraud and too much government spending.  But there HAS to be a debt.  And it should not be called debt because it isn’t debt.

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Steve Jobs life – lessons of a genius

I had never read Steve Job’s bio until his passing today.  Interesting how his path mirrors advice in one of my early posts on this site “Don’t Go To College”.

Steve Jobs went to college but quit after one semester.  He stayed in town for another 18 months and “audited” classes which I take to mean he showed up, listened and learned, but didn’t pay or take exams.  He slept on the floor of various friends rooms and “followed his interests”.

He said in a speech “much of what I stumbled into by following my curiosity and intuition turned out to be priceless later on.”

Jobs and Wozniak also started Apple with a whopping $1300.  Even in 1976 that is a shoe string budget.  The cries from Republican politicians that “job creators” need more and more tax cuts and money so that they create jobs is laughable when you realize how little money was used to start companies like Apple, Facebook, Dell, Microsoft and many more.  Ideas, passion and drive are far more important than money or tax incentives.

Jobs also travelled internationally at a young age and jumped from job to job.  An unconventional life leading to extraordinary results.

RIP Mr. Jobs.  iSad

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How our monetary system really works

Cullen Roche at has been my teacher on how our monetary system really works.  The school of economic thought is called MMT or Modern Monetary Theory.  I’ve written on the topic, but below is a long comment within one of his posts that gives a full description.  Keep in mind, if you have never heard these concepts before, you are likely to be scratching your head throughout.  I have written a few posts that try to keep it really basic here, and here.  But make it through Cullen’s comment and you will realize we’ve all been taking the “blue pill” and so our economy has been driven off a cliff because so few understand how our system really works.

Cullen, take the mike….

MMT is modern monetary theory. I believe the name is a bit of a misnomer as it is really just a way of describing how modern monetary systems work. The theory is all in it application (not all of us agree entirely how the govt should utilize its strengths, but we agree for the most part I think).  Learning it can take some significant time as it turns most of modern economics on its head, but I think that understanding MMT is vital in understanding how the modern monetary system works.

Start with the following link and continue on. Please feel free to ask any questions via the comment section here or email. I try to answer all questions as best I can:

The govt is not a household or a state. They do not finance spending via revenues. The US govt, as a monopoly supplier of currency in a floating exchange rate system simply spends. Think of the US govt as an alchemist. The alchemist can create as much gold as he pleases (from nothing) in order to buy up productivity and satisfy the growing monetary demands of the people he supplies currency to, but he has to be very careful not to debase his gold. Hence, there is no solvency risk for the alchemist. Only a pseudo form of default via currency collapse (hyperinflation).  He only debases his gold when he issues an amount of gold that is in excess of productive capacity (inflation).

We do not finance our spending via the bond market. Taxes do not finance spending either. We issue bonds as a form of controlling the Fed Funds rate. It’s a pure monetary operation. Not a fiscal financing operation. We issue bonds to maintain the money supply by controlling the overnight rate and control excess reserves. People think this is govt debt because Congress mandates the issuance of bonds and that’s how the system works in Europe and under the gold standard. This thinking has never changed despite the dramatic changes in the monetary system after the Nixon shock. I am quite certain that Bernanke understands this (or at least partially), but I am also quite certain that most other people in power do not (otherwise we would never have made all the policy mistakes I have been pointing out over the last few years).

Let’s understand a few things first:

1. Foreigners do not fund our spending. That is a fact.

2. The bond market is a monetary tool. NOT a fiscal financing tool.

3. We tax in order to create demand for the currency. In addition, it controls aggregate demand or effectively, the money supply.

I’ll use an example I often use. Please excuse the simplicity, but this can be a mind bending concept if you are textbook taught (trust me, I know the feeling) so I will keep it simple:

I start a new country where there is a productive economy and I invite everyone to become citizens. Rather than forcing all of us to trade with heavy gold I issue TPC notes. Now, in order to create real demand for these notes I create a tax. This makes you beholden to me via the TPC notes. You MUST have them in your account on April 15th of every year. I’ve created instant demand. This is what the US government does. In return, they spend money on public works, create jobs, supposedly spend money on furthering our nations prosperity (in theory at least) and protection of the nation (a military).  This is important to understand because I must issue notes BEFORE I can tax.  Therefore, you can see that I am not funding my spending by taxing.

How do I enforce your use of the TPC notes? I create jobs via a military and a police force and pay them well. Don’t want to pay your taxes? Say hello to officer Joe. A group doesn’t want to pay their taxes? You can protest, but if you get out of control I will introduce you to 500 men wearing body armor holding M4 carbines. In other words, don’t question the currency or else….As long an economy is productive, the sovereign nation can enforce the use of said currency, and as long as we don’t issue excessive currency there should always be demand for it. In other words, trust in the national currency is safe as long as the rule of law is maintained, corporations are productive and I maintain my ability to tax you.

I do not borrow from governments or tax to spend as I would if my currency were backed by gold. Interestingly, I can’t TAX you until I’ve credited your accounts with TPC notes. There is no money to be taxed otherwise. So, in effect, I have to SPEND in order to TAX (counter-intuitive to what you have been taught). Taxing debits your accounts (saps liquidity) and crediting is government spending. On my island, I am never revenue constrained. If you don’t pay your taxes I will throw you in jail and confiscate your money. But that doesn’t mean I can spend more when I tax. What do I care if you send me your TPC notes? I can just press a button and credit my “spending” account right after I shred your tattered looking cash. This is what the government actually does. Taxation is essentially a form of maintaining control of private sector spending. Pay your taxes in cold hard cash. The IRS will shred those dollars. They don’t put them in a bag and mail them to the Treasury so they can’t go “spend” it. The only reason they might keep the dollars is if they are pretty and in good condition so they can go back out into circulation.

So what’s the bogey here? What’s the catch? Because surely you must be asking yourself why this sounds like a free lunch.  We can just spend to our hearts content, right?  Absolutely not.  The bogey here is inflation which is constantly moving up and down with the amount of money in the system based on my tax rate, spending, etc. Thus, govt cannot just spend and spend and spend or the extra dollars in the system will chase too few goods and drive up prices. Thus, it’s important to understand that govt cannot just spend recklessly. This is important so I’ll say it again. This does not give the govt the ability to spend and spend and spend.  If they spend too much and tax too much they can create malinvestment and inflation.

In terms of the bond market, the issuance of bonds does not serve the same purpose it did under the gold standard. We actually issued bonds because we were revenue constrained (not enough gold reserves at all times to fund spending without creating massive inflation). Today, we effectively control the value of money in the banking system via bond issuance (a pure monetary operation to control the Fed Funds Target Rate). It can also be thought of as another form of government spending because a treasury bond is basically a savings account. Contrary to popular opinion, QE is actually a deflationary event because it takes an interest bearing instrument out of the private sector’s hands and replaces it with a non-interest bearing deposit. QE is a term that is used by people who want to scare you into thinking that the govt is being reckless with their money. The reality is that QE is just an asset swap. Nothing more. Debt monetization is another tool of the fear mongerers who don’t understand that debt monetization is actually impossible so long as the Fed has a target rate. It’s operationally impossible.

The US government is never revenue constrained. They are not like a household or state government. We don’t need China to buy our bonds in order to spend. China gets pieces of paper with old dead white men on them in exchange for real goods and services. They can either hold that money in a checking account at the Fed OR they can do what they wisely do and invest those pieces of paper in what is actually a savings account at the Fed. We also don’t need taxes to spend. The budget deficit is in direct inverse correlation to private sector savings. To be more precise: net household financial income = current account surplus + government deficit + Δbusiness non-financial assets.

This by no means says that the government can just recklessly spend. But it’s imperative that the government spend SOME money otherwise they are simply debiting the system each year via taxation without ever crediting accounts. Just ask yourself what would happen if the govt imposed a one time 100% asset tax? The private sector would instantaneously be without money. How would they spend? How would they invest?  The economy would collapse and the government would be “rich”.  Not a plan for economic prosperity.

Many financial theorists actually believe the Great Recession (and the Great Depression) was caused in part by account SURPLUS. You’ll notice that both events were preceded by great periods of “fiscal competence”, ie, budget surpluses. In reality, the govt had debited too many accounts and forced the private sector into deficit. This results in the private sector borrowing what it can’t actually get its hands on. The risk is full blown debt deflation due to excessive debt levels (because you borrow what you can’t actually get your hands on). I think the cause is a bit more complex than that but the fact that we are grossly overtaxed and the govt spends very inefficiently is a large contributing factor.

That’s a very rough sketch of our monetary system. Still confused? Read this:

And this:

And this:

And this:

And this:

And this:

Head spinning? Read the links in each. It will spin more….Everything you’ve learned in school is wrong….Well, most of it….

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This is not a banking crisis

I ran across a article from 2010 describing the real economic crisis we have been experiencing.  Funny that the banks were bailed out when this article so eloquenty makes the case that it is a consumer crisis:

When the housing bubble imploded in 2008, it shattered consumer balance sheets.  Make no mistake – this is not a government debt crisis in the United States (as the  hyperinflationists and defaultistas have tried to convince us).  It is not a banking crisis (as Ben Bernanke has told us).  It is a private sector debt crisis – primarily a household debt crisis.

Good reading if you want to know what’s really happening in our economy rather than the nonsense repeated by the media and our politicians.

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The Federal Reserve causes bubbles

The Federal Reserve note only can’t pull us out of this mess, but they caused it.  From John Hussman’s weekly market commentary on Sept 5th:

At the point our nation recognizes that the pattern of repeated bubbles, crashes, and misallocation of capital is not solved by the Fed but is instead caused by the Fed, it will become clearer that the best path to economic recovery is to shift attention toward debt restructuring, real investment, useful infrastructure, and the creativity and work ethic of real human beings. Until then, we will have an economy built on speculation and paper, stacked into a flimsy house of cards.

Some sound advice in additional comments:

The policies that the Fed is pursuing here distort market signals, create speculative incentives, and encourage the misallocation of capital. There should be no doubt that this will damage our economic future over time, but we will only discover exactly the form of that damage later. The best vision
for the United States is one where the markets allocate saving toward productive investments that legitimately have the potential to reward that saving, where the banking system finances good ideas and useful economic activity instead of looking for the next profit opportunity from financial engineering….”

In the same article he essentially announces that we are in recession given the data set they track.

Another interesting chart is one showing that government “transfer payments” in the form of unemployment benefits are at record levels.  This indicates support from the government of the economy as a whole, and of company’s profit margins.

I find this interesting because it is MMT – meaning government needs to spend into the economy during economic recessions.  Of course unemployment benefits is probably the least productive use of government money.  Imagine, for example, that money going to jobs in infrastructure.

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