The point of my post had nothing to do with the idea that the government needs to save money. The point of my post is about intelligent spending. Also as I pointed out trying to force the government to cut spending is likely to be detrimental to the economy. So the above may be relevant to others but unnecessary to my point.
Then my apologies for misunderstanding your point.
I'm not criticizing the monetary system, just the government's attempt to influence it.
Do you think there is a better alternative?
Well two things. The government would choose to take money out of the economy to limit things like inflation.
Quite right, as I said, the limitation on spending is productivity. Inflation happens when demand exceeds supply. However, I think one of the mistakes that most people make is they underestimate the worlds capacity to absorb net new dollars without creating inflation.
Further, domestically, how might you measure that capacity?
One way it to look at a chart that measures how much capital resources that companies report they own relative to how much of those resources are being utilized. Under utilization generally means that productivity could increase without expensive capital investment.
Both charts show the same thing, the point is there is a buffer between utilization and capacity, at least domestically.
sellers will take advantage of that and drive up prices since people will be willing to pay more for the same product or even pay more for less.
First, let's be clear, the entire world experienced inflation as a result of COVID because, as you can see from the chart here in the US, there was a pretty massive dip is capacity utilization. This caused massive disruption and lead to shortages. That said, companies were also profit taking, in that their increases in prices exceeded their costs. Of course just as the wage spirals in the late 1970's lead to price increases, companies are causing cost spirals as their inflate costs and pass those costs on to each other. Competition is supposed to prevent this, but given the consolidation in private space that's taken place over the last 30-40 years, we now have just a handful of companies controlling, for example, most of our food.
Thus it only takes a handful of decisions at the highest levels to increases prices though corporate policy (i.e. there isn't enough competition.
Evidence?
Comparing all recent periods of inflation with the one that took place during COVID is revealing.
As you can see labor AND net input costs have contributed less to inflation than the surge in cooperate profits. That's not to say that I think corporations are bad, I just think as a nation we've done a poor job regulating them and are now (litterally) paying for it.
Regardless the point is that there are intelligent reasons for the government to remove money from the system.
No, there aren't. That's called austerity, where the solution to running out of oxygen in a room is to choke people so they stop using it, rather than just add more oxygen. Sure both accomplish the same thing, but one causes immense suffering for most of the population.
And yes, in real terms there are enough resources to ensure that austerity isn't necessary.
Secondly, how do we know if we are balancing the economy?
I admit that is a complex question, but to give you a simple answer....Unemployment is a good measure. U6 unemployment measures how many people are looking for work and cant find it. You could also look at the number of jobs in a region relative to how many people are out of work.
Of course you'd have to keep an eye on the capacity utilization chart and limitations on real resources, especially energy which is volatile speculative market that has an outsized influence on inflation.
In other words, if there are people looking for work and work that needs to be done, your economy is probably unbalanced unless there are other structural issues. If there are, the solution is to address those issues (whatever they are).
One thing I learned is that throwing money at a problem doesn't guarantee that the problem is going to get fixed.
That's right, taken in a vacuum "throwing" things around won't ever work, at least sustainably.
If you and I are going to agree on what the fix is, we'd first have to define what the goals we believe are goals that should be pursued by our government and in the private sector. Only then could we evaluate our opinions in the context of what is happening in the country.
That said, spending money into our economy is necessary, but I think we'd agree that all spending doesn't achieve the goals I think we could probably agree are "good". But then the solution isn't the level of spending, rather how the money is being spent.
A way to do this is by monitoring tax revenue. The more tax revenue an economy is generating the more booming the economy. Again this is not about forcing the government to "save" money but gauging how effect government spending policies are.
First, let's establish something, then I'll circle back to taxes and their purpose.
What do we do as a nation when inflation get's to high? We increase interest rates. The idea being that increasing rates will slow spending. and slow spending will allow productivity to level out against demand. Most people believe it is too much spending or, too much money in the private sector that is the cause (thought I don't always agree with this take), but ironically, increasing interest rates has the opposite effect. Well, in fairness it does both. Higher rates hurt people who are in the bottom 2/3rds of income earnings. But it helps those in the top 10%, and adds billions of dollar in new money into the economy. This might explain the disconnect between the stock market doing well while the rest of the country isn't doing so well, because people with lots of money are being paid to save and their using that income to buy more investments.
The red circle is money paid out to holders of US treasuries. So while interest rates are increased to decrease spending in the economy, it is simultaneously adding billions of net new dollars in interest revenues back into the economy into the hands of the people that need it the least. Which, IMO is why when you ask anyone in the bottom 1/2 of the economy how they feel about it, they'll tell you, pay is down and prices are up.
Taxes are the only method to control inflation driven by spending. That is one of the purposes of taxes, to maintain the spending power of the dollar (i.e. control inflation).
But, Congress cannot enact tax increases on the people that have most of the money (and are driving most of the inflation) because of how much those politicians rely on the donations of the people they need to tax in order to control inflation. So instead the job falls to the Fed who thinks they have any control at all.
Of course people are continually surprised that all of this money isn't creating run-away-inflation (though people like Peter Schiff has been telling anyone who will listen we're right on the cusp of a spending fueled inflation collapse to anyone who will listen over the last 20 years).
Right and the way to gain knowledge is by monitoring a set of key indicators like a balanced budget.
This part of the conversation could get very long, so I'll give you a short example of an "economy" that is balanced and I hope it will make sense why it wouldn't work.
How does one get into a movie theater? With a ticket. The ticket is the currency of the theater. If you try to give the usher $15 he'll send you back to the ticket counter to get a ticket. What is the ticket? Just like the dollar it is a debt from the theaters perspective. As long as you hold the ticket you are owed a seat. It is your asset and the theaters debt.
When you enter the theater the usher destroys it by ripping it in half. Thus 100% of the tickets created are destroyed. This is an example of a balanced budget. The problem is that zero tickets would circulate as all of the tickets created are destroyed in short order.
But if you wanted to ensure there were tickets in circulation you'd have to issue more than were destroyed.
So, let's say you issue 10,000 tickets in a day, but only redeem 1,000, now 9,000 are circulating. That is the money we use and roughly how it works. The government spends money and taxes back some portion of it leaving some amount to remain in circulation as money to be used (economists call this "private sector savings").
But what happens if the population grows, productivity increases? Well, you are going to need more tickets. You're going to have to run a larger debt, but you can't if you have a balanced budget. The money in circulation cannot increase (unless you use private sector debt which has very finite limits).
The point is, when you balance the budget you ensure that your economy cannot grow, it is locked in at the moment you balance the budget. But population doesn't stop, so in 30 years when the population increases by 100,000,000 people they are going to be competing for the same number of dollars as there were the day the decision was made to balance the budget.
Balancing the budget would initially cause private sector borrowing to go up (pre-2008 like, until the private sector was maxed out and the system would crash and make 2008 look like party time.
Excellent conversation, apologies for my long-windedness. Being brief was never my strong suit. I just hope you found it interesting if not compelling. If not, I look forward to your reply.
Respectfully,
EG
