Tag Archives: Debt

The Truth About Tax Cuts

cashme

This kid is gonna be POTUS one day.

Let me ask you a question: for what do you think your taxes pay? Is it better roads, good schools, social services, like firemen and police?

Maybe, probably at the state and local level. But, at the national level, your tax dollars really don’t pay for anything.

Let me repeat that: your tax dollars really don’t pay for anything.

In the U.S., our government can literally print as much money as it wants. It can completely eliminate its liabilities more or less at will. So why collect taxes?

The truth is that, at least when it comes to taxation on a national scale, our tax dollars don’t “pay our bills.” Our government can literally print as much money as it needs to cover any entitlements, military spending, or pretty much any other bonafide social safety net expense or ridiculous boondoggle it decides to fund. Imagine if you had your own printing press that could perfectly reproduce Federal Reserve notes. And it was completely legal. Would you ever be short of cash? No? Well, that’s pretty much the way our fiat currency system works.

Politicians play on the fact that, as a controlled commodity, it’s difficult for most people to accumulate money in significant amounts. So they talk about “deficits,” ”debt,” ”spending,” etc., referencing metaphorically what most people live very much literally. The government never has to worry about running out of money. Think of it as having a bank account with infinite dollars.

When it comes to money, the government is concerned about something else entirely: debasement. It’s more worried about printing so much money that it becomes worthless. A debased currency makes everything tremendously more expensive (except debt, which would actually decrease in value).

So there are mechanisms within the fiat currency system to prevent an excessive accumulation of money. In other words, our monetary system contains mechanisms for destroying money. Fractional reserve banking is one such method.

The other is taxation.

The purpose of taxation is to remove the “extra” dollars from the economy. However, as it functions, this system is profoundly flawed.

If the purpose of taxation is to remove excess money from the system, consider what happens when taxes are “cut.” When the government cuts taxes, it has decided to remove less excess money from the economy. Why would it do that? Because, at least theoretically, the additional money could be used to spur innovation and productivity, which we call “economic growth.” That economic growth translates as societal wealth, in the form of better goods and services. Economic growth is what propels us all into progressively higher standards of living, at least materially.

However, what happens if that additional money does not create economic growth? What happens if major new innovations are not created and productivity doesn’t actually increase? What happens when the options for monetizing new products and services simply don’t materialize? Think of the “unicorns” of Silicon Valley… what would happen if Uber flamed out? What would happen if the public ends up rejecting augmented reality (AR) or virtual reality (VR)? What happens if self-driving cars end up being a dead end?

The key for tax cuts is that, if they don’t spur growth, they exacerbate the problem of currency debasement. Rather than allow the government to get those dollars back, the wealthy prefer to hold on to them by whatever means, legal or illegal. Our laws and force apparatus give those dollars real worth even though they are inherently worthless. As a matter of status, the rich want to keep those extras dollars to buy the bigger house, the bigger boat, the bigger jet, etc. More houses, more boats, more cars. At a certain level of wealth, it’s all ego tripping.

Which brings me to this point: have you ever noticed how tax cuts go almost exclusively to the wealthy? Why don’t they go mostly to those lower on the chain? The simple answer would be because that would defeat the purpose. People further down the chain will simply spend the money into the economy. “What’s wrong with that?”, you may ask. “Aren’t the rich going to get the money anyway?”

Yeah, but there’s a problem with that… it’s called “price inflation.” When merchants and businesses know that there is more available money in the economy, they tend to raise prices. Since taxes can’t be cut enough for most of those lower down the economic chain to make a material difference in their incomes, the effects of “tax cuts for everyone else” will likely simply translate to higher prices. So the money will indeed “trickle up” (actually flow up), but then everyone will be stuck with higher price levels for goods and services. Oddly enough, funneling the money directly to the rich prevents that outcome.

The real question is “Does it work?” My best answer is that it has to, at some level. At least materially, our standard of living continues to increase. There are a few large bets on the horizon technologically that could have a major positive impact on living standards, such as AR, artificial intelligence (AI) and machine learning (ML) , and autonomous vehicles. Will tax cuts help those big bets pay off? It’s possible.

But, in the wake of that, a potentially dangerous condition is also developing: the increased displacement of human labor in the value chain. Labor is the method by which most people acquire the means to participate in the economy; simply put, it’s how they earn money. However, globalization and increased technological automation is leading to an increased deprecation of Labor value. At the more developed end of the spectrum, employment is either shrinking or progressively moving to lower wage work. All signs are that this trend is accelerating. So far, Capitalism has not found a way to address what it perceives as a short-term transition that could easily become a long-term crisis. Tension is already rippling through the most advanced economies in the form of increased populism. The world is changing and Capitalism so far has shown little capacity to manage that change effectively.

If you look at taxation from the perspective of its intended purpose, then you can understand how disingenuous the arguments of the wealthy are against higher taxation. The rich want those further down the chain to shoulder more of the tax burden. The reality is that such a proposition will almost certainly have a profound effect on economic growth. As the middle class evaporates, those lower on the chain can barely afford to make their way in the modern economy as it is. If the purpose is to get the “excess” dollars out of our economy by getting it from those who can least afford to give it, I don’t see how that is going to have a positive outcome. The reality is that we tax the rich because they have the excess dollars. Their argument is that they are the ones who fund innovation and enterprise. But it’s just as likely that they will devote their money to financialization; in other words, they’ll use safe financial instruments simply to make more money rather than making riskier bets that may spur much greater growth. Even worse, a lot of that money will be used simply for indulgence, avarice, and status-seeking. As displays of opulence and decadence become more visible in our more socially connected world, the potential for backlash increases substantially, the outcomes potentially catastrophic. Remember the French Revolution?

The truth is that our economic system is fundamentally unbalanced and likely to become more so. Money is being kept out of the hands of the very people who need it most and given in wheelbarrows to the very people who need it least. The worst part is that this is probably our economy’s optimal condition; it is unlikely that the system can be made more equal, or even more equitable, without running the risk of high price inflation at least, and, potentially, economic collapse. As it stands right now, the only way the system continues to function is if it continues to become more and more unequal.

I don’t see how that ends well.

What Makes the Chron Different

duelI enjoy a good debate. It’s the closest thing to dueling there is today and I love to mix it up. I think that vigorous debate is the cornerstone of learning and I envy the great thinkers of the past who engaged their peers in no holds barred intellectual contests. While I obviously can’t be certain, I feel comfortable stating that greater understanding was the goal though I’m sure bragging rights probably played a role too.

Today, that great pastime is almost completely extinct. Any disdain for weak or flawed ideas is interpreted as “trolling” and hitting the block button on your favorite social network is much easier than being confronted by the uncomfortable truth that your favorite idea, opinion, or belief simply doesn’t have legs.

As I stated in my previous post, Trump, Twitter, and the Failed American Experiment, I did not expect the core concepts of The Currency Paradox to hold up (though I hoped they would). I figured there were too many people with too much expertise on the subject to allow my essay to stand.

Two years later, the core concepts of The Currency Paradox have yet to meet a significant challenge. I honestly am not sure if it is because what I wrote is so bulletproof or so feeble that people are unwilling to discuss its flaws or merits more closely. I think time and evidence have continued to strengthen my points but, if I had to be completely honest, I really don’t know. Maybe the ideas are just so impractical or esoteric, people are just content to ignore them.

In lieu of debate, I’ve decided to address what I think are potential criticisms. I think the most likely one is that the ideas behind the chron, the currency innovation presented in my essay, just aren’t original. After all, currency solutions based on time have been around for a very long time.

To preemptively address that criticism, this post is about what makes the chron different from any other time-based currency solution. The factors that I’ve identified are as follows:

Two Monies vs One: probably the most significant difference the chron has versus other time-based currency solutions is that it fundamentally acts as two currencies rather than one. The eChron, or “earned chron,” represents chron that are earned as a result of effort; the xChron, or “exchanged chron,” are earned chron that are used for trade, exchange, or commerce.

This is a useful innovation because it solves the taxation problem related to most currencies in general and time-based currencies in particular. The eChron are untaxable because they are the result of the individual’s effort, the taxation of which would constitute theft. The xChron is taxable because it is given in exchange, requiring practically no personal effort.

Compatible with free markets, risk vehicles: While the eChron ensures that everyone has the same base level of pay, the xChron allows additional compensation to be awarded based on market need. This is elaborated on more fully in The Currency Paradox.

Also, because the chron is seamlessly fungible, it is a direct replacement for central-bank issued (CBI) currency and can be utilized for any risk vehicle in which CBI is used.

Compatible with modern banking: The xChron allows the chron to be used for modern banking. In other words, it is compatible with the concept of the debt liability; like CBI currency, banks can write loans in xChron. One of the main advantages of the chron is that, because they are created by people creating value by effort rather than the loan creation process, the conundrum of using money from a net-negative sum loan (due to the demand for interest) to pay off another net-negative sum loan is avoided.

The best way to think about this is that, rather than money being created from the issuing of loans, everyone owns their own money which is “printed” as a result of their time/effort.

Expansionary or contractionary: Using taxation and modern banking, chron supply can be kept very near to supply/demand equilibrium, unlike other time-based currencies. As an objective, value-based currency, a far more precise picture of the currency in circulation relative to its demand as well as any related interest obligations  can be captured versus CBI currency.

Compatible with all pricing models: How would you price a book with chron? Simply charge for the estimated time it would take to read it. A book that would take roughly an hour to read would cost 60 chron. This pricing model can easily be applied to journalism as well. How about ears of corn? Try “growth time” divided by number of ears.

Almost anything can be priced based in time/effort.

In short, what makes the chron unique among other time-based currency solutions is that it is:

  • Taxable;
  • Seamlessly fungible;
  • Compatible with free markets and modern banking;
  • Expansionary and contractionary
  • Objective.

The chron solves every major problem related to currency, including all those related to other time-based currencies. To learn more, please read The Currency Paradox.

Disagree? Then, by all means, please leave a comment.

The Riddle of Scarce Abundance: A Redux

oracle of Delphi

In my post, Currency and the Riddle of Scarce Abundance, I offered what I thought were the ideal traits of a cryptocurrency that had the ability to replace fiat currencies.

Since then, Bitcoin, the current cryptocurrency poster child, has once again embarked on a roller coaster ride of volatility, prompted mainly by the defection of a prominent developer in the Bitcoin community, Mike Hearn. In his post, The resolution of the Bitcoin experiment, Hearn refers to Bitcoin as a “failed experiment.” Many conflated Hearn’s statement to mean that Bitcoin was “dead” and gleefully pointed to the exchange rate and transaction volume to paint him as a bitter opportunist who also had the ignominious condition of being dead wrong.

Here’s the thing though… Hearn never claimed that Bitcoin was “dead” he only claimed that it had failed. In that respect, I think there is a lot of evidence that he may be correct. Despite the claims that Bitcoin transactions are increasing, there is almost no evidence that its use for common financial transactions is increasing. As for its exchange rate, there are many incentives to trade in Bitcoin, few of which are relevant from a currency standpoint. The truth is that Bitcoin, in its best case, only shows utility as a speculative vehicle and, in its worst, shows signs of being heavily manipulated.

The simple reality is that, if a cryptocurrency intends to replace central bank-issued fiat currency, people, first and foremost, have to have an incentive to use it for common financial transactions. As I’ve stated before, no one truly has an incentive to use Bitcoin every day. Why? It’s too volatile and doesn’t really do anything significantly better than the current currency paradigm.

My thinking is that Bitcoin suffers from an abundance, or lack thereof, problem. Its scarcity is used as a means to trap value but it works against the currency being used every day. I’m willing to admit that this may strictly be a matter of psychology. But the truth is, Bitcoin feels scarce. Its deflationary bias exacerbates that feeling. Not only is it not practical as an every day currency, it feels like it’s not practical as an every day currency. People intuitively understand that Bitcoin doesn’t work because there isn’t enough of it to go around (yeah, I know, “divisibility,” blah, blah, blah).

In my opinion, the best use case for a cryptocurrency in today’s world is as a reserve currency. People may choose to buy U.S. dollars for that purpose but I think there would be something uniquely encouraging for many people if there was a popular currency that was not controlled by any nation that could also be used seamlessly across borders. But I think it also has to feel like a currency as well. There has to be both an actuality and an intuitive sense that the currency is stable yet flexible, that it can grow effectively with demand without destroying its ability to store value. Call it “faith.”

What I came to understand is that a currency can expand as long as it remains in lockstep with demand. There has to be effective mechanisms to destroy money as well as create it in an economy. I think many of the problems faced in our current economic system stem from a fundamental disequilibrium in the creation and destruction processes of money. The imbalance is caused by the demand for interest on debt-based money which creates a net-negative sum bias. The result is that, as debt is serviced and profit is protected, an artificial scarcity of money is being produced in the every day economy which is encouraging a deflationary environment.

As an aside, many people believe that technology is a major factor driving deflation. This is an interesting theory. My first response is that this leads to a very strange syllogism:

  • Software allows more to be done with fewer resources;
  • As a result of software “eating the world” and efficiencies of scale, fewer resources are being consumed;
  • The result is deflation as there are more resources available in relation to demand.

Here’s where this gets tricky for me: how does this reconcile with an expanding money supply? At the personal level, if I have a smartphone that can substitute for a myriad of devices, it stands to reason that I should have more money in my pocket. Now scale that out to hundreds of millions of people. If deflation is less money chasing more goods but tech is helping people keep more money in their pockets, then how is technology causing deflation? Indeed, technology should be having an inflationary effect, at least monetarily, relative to the expanding money supply. The expansion of markets globally easily translates into greater use of resources in aggregate. It should not be possible for technology to have a deflationary effect. Quite the opposite actually.

Indeed, there is a massively deflationary element counteracting the naturally inflationary bias of technology. There is mounting evidence that rents, particularly in housing, are contributing to that effect. So, even in an environment in which technology should be putting more money in people’s pockets, the demand for that money in the form of rents is systematically eroding people’s personal wealth. So even with more income and personal wealth, many people are actually poorer as the result of the increased demands on it. This seems to validate Thomas Piketty‘s research on economic inequality. The economist Branko Milanović has coined the term “wealth-poverty” to explain this phenomenon.

The money supply is expanding at an amazing clip, more natural resources are being consumed now than at any time in history, yet disinflation/deflation is a problem in all but the most corrupt countries. This is a strange contradiction, one that has many central bankers puzzled. Disinflation and deflation suggest that the expansion of the money supply can’t keep up with even the tepid amount of growth that we are now experiencing.

So how does all of that relate to cryptocurrency? Well, one of the advantages of a cryptocurrency is that it can provide insulation from the current economic forces. A stable cryptocurrency can provide a completely liquid safe haven and act as an effective counterbalance to central banking monetary mishaps. Think of it as a safety net for the global currency system.

So getting cryptocurrency right is very important, so much so that I think even central banks would be able to get behind a good one. It could be used as an escape hatch should the worst happen.

But, as I’ve shown before, Bitcoin is already rigged in favor of its early adopters. Increased demand would only ensure that each subsequent purchaser of it gets less and less while the fortunes of those who accumulated early and cheaply would go through the roof.

The answer is the creation of a cryptocurrency that allows true supply/demand equilibrium. Everything necessary to create it now exists. As in many things, it is not a lack of capability but a lack of will that is preventing it.

Greece and the Grexit: A Solution

yanisI’ve been paying close attention to the situation in Greece. While I’m fascinated by the economic problem of a sovereign country being in the position of having no control over the currency it has chosen to use, the tragedy of the hardships faced by the Greek people troubles me. Watching a whole country reduced to beggar status, especially in what is hands down the most technologically advanced time in history, is both intriguing and sobering. While a situation such as Greece would be far more difficult for countries that print their own currencies, it appears to be serving as a test case for other countries reliant on the euro as their chosen currency.

In situations like this, everyone thinks they have a solution and I’m no different. I think the innovation presented in The Currency Paradox could definitely help Greece. In fact, I think it could propel Greece to become one of the strongest economies in the European Union and the world.

The fundamental problem in this situation is that Greece cannot print its own currency to address its systemic problems. Its reliance on the European Central Bank (ECB) to provide euros in a situation in which Greece is already unable to pay the interest on the euros it has already borrowed means that Greece cannot borrow the money either to pay for the obligations it already has, such as pensions, or to fund investment which could help it address its debts in the future. It is figuratively stuck between a rock and a hard place. The world, particularly other cash-strapped members of the European Union (EU), are paying attention to how this all resolves as it may provide a playbook for future crises along this line.

Many economist think that Greece will end up again printing a national currency to use in parallel with the euro. The problem with this approach is that a new Greek currency would instantly be worthless, especially in relation to the euro. With its huge debt load and sputtering economy, the incentive to buy debt denominated in a national Greek currency would be very low, even if Greece were to offer very attractive interest rates. In other words, a new Greek national currency would instantly become “junk” currency. A near valueless national currency would do little to dig Greece out of its current hole and could well make matters worse.

The innovation in The Currency Paradox is particularly well-suited to address this Greece “chicken/egg” scenario. With tremendously high unemployment and not enough euros to spur investment, it can be reasonably posited that Greece has a very high amount of pent-up productivity. In the end, when investors purchase a country’s bonds, they are investing in that country’s potential for productivity. Right now, the combination of Greece’s onerous debt load and comatose economy suggests that it’s a “money pit,” that any investment is more likely to end up servicing debt rather than going into investment that will spur productivity that will guarantee a return on investment. Under its current circumstances, Greece is largely unable to offer incentive that makes it attractive for anyone other than the most courageous to invest in its economy.

However, what if Greece’s currency was created by its own productivity? What if its currency production was the result of the efforts of its employees and entrepreneurs? Under those circumstances, it would be impossible for its currency to be worthless as each unit would represent the result of effort already expended. This would encourage full employment and, with the right regulatory climate, a tremendous increase in entrepreneurship and innovation. The key for Greece is not to use currency to spur productivity but to use its productivity to create currency.

The tricky part is exchange. How does Greece value its current debt obligations in the new currency? The innovation in The Currency Paradox provides some clues. The key factor is that the innovation allows for a means of determining the absolute price, sans profit, of any item produced within the country. Therefore, all intranational goods can be efficiently priced and an accurate picture of purchasing power, from the national all the way down to the individual’s, can be precisely determined. In other words, intranational exchange of goods and services can be priced with precision and all intranational goods and services can be exchanged solely in the national currency efficiently.

Another factor is that the currency, because it is not debt-based, is, by nature, surplus money. While most money creation is based on the issuance of credit, thus producing either neutral or net-negative money, a money that is created by effort does not inherently have a debt-obligation (though, for the purposes of managing the money supply, it can), so return on investment is guaranteed. In a world where almost all money is debt-based, a surplus money would have tremendous advantages and be extremely attractive to investors.

In the end, investors want positive return on investment. In its current situation, Greece can neither pay its debts nor secure enough euros to spur productivity-producing investment. The innovation in The Currency Paradox defeats this condition by allowing Greece to put its people to work to produce its currency. With a surplus currency secured by the efforts of its people, not only could Greece dig itself out of its hole, it could become the model for a world beyond Capitalism.

An Alternative Theory of Deflation

blackholeRecently, the Big, Scary Word™ in economics is “deflation.” Like most things in economics, deflation as a concept is a double-edged sword. On the one hand, deflation relates to an increase in a money’s general purchasing power. But, on the other hand, deflation creates a relative increase in the value of debt. So it tends to be pretty good for consumers in general, but not so great for those businesses or persons who carry significant debt.

Whether deflation is good or bad for an economy is debatable and, indeed, it is being debated vigorously. The odd thing is that economists seem to be unsure why deflation is taking place especially considering how much currency is being created. The money supply has skyrocketed in recent years so it stands to reason that inflation rather than deflation would be the major worry (and it has been).

I figured I’d take a stab at explaining the recent deflation phenomenon. My theory can’t be worse than anyone else’s, so why not try my hand, right? Well, actually it can be but I’ve never let that stop me before, so here we go…

When I conceptualized the innovation in The Currency Paradox, it was important that it be applicable to market-based economics as well as the profit incentive. The key with markets is that they work better when more and better information is available; the currency innovation I conceptualized makes markets “smarter” by making more essential information available for every transaction. Many aspects of market-based economics as they now exist are opaque and subjective; the innovation presented in The Currency Paradox introduces an element that would bring an unprecedented level of objectivity to market-based economics that is unambiguously quantifiable. Just as importantly, it is completely compatible with the concept of making profit. However…

What is “profit”?

Sure, the idea seems simple enough … I describe it in The Currency Paradox as a “convenience tax,” a surplus fee added to every transaction by anyone selling a good or a service simply for the act of making that good or service available in a convenient way. But, think about it for a second … the important distinction is that it creates a surplus as measured in money/currency at the end of most transactions. Now, from where does the money which creates this surplus come?

This can be answered in different ways like “capital gains” or “employment” but generally the money is associated to some effort attached to the repayment of credit. Why is that the case? Because the overwhelming bulk of money is produced as credit for the purpose of making profit by charging interest.

This creates an interesting conundrum because, as a result of the interest demand, every act of credit creation is a negative sum transaction. In other words, everyone who is issued a loan has to produce more dollars than the transaction itself produces. Hmmm…

Now, from where do those additional dollars which are expected to cover the interest on the loan come? In other words, from where do the extra dollars come?

This seems to be a serious problem because, generally, in order to repay a loan, a person or entity has to create value greater than the costs of operational and capital expenditures. This is generally done by setting a margin of profit for every item sold or transaction processed. However, those “profits” were themselves created as the result of loans which also, as a result of a demand for interest, were negative sum transactions from a money creation standpoint.

This is all a very roundabout way of stating that there is always a money deficit which increases (in fact, compounds) every time new money is created. Because of the interest demand, every time money is created by a loan transaction, it produces a net negative in the form of a debt. So the only way for old debts to be serviced is for new money to be created which means greater total debt. The effect is a system in which the dollars are, for all intents and purposes, cannibalizing themselves. The worst part is that profit, and all enterprises or entities which excel at generating profit, exacerbate the problem.

The logical net effect of this is a deflationary cycle. The profit incentive demands a surplus from the system that does not exist. To the contrary, the paradoxical effect is that, the more money that is created, the less money there is as a result of the demand for interest.

As I stated in The Currency Paradox, fractional lending isn’t really a problem; as long as all debits and credits cancel each other out, then managing the supply of money based on demand, even using fiat currency, should, in theory, not be an issue. Even the inflationary bias of fiat money should be able to be easily managed in a system in which debits and credit cancel out. However, interest seems to be having a massive deflationary effect; it requires debtors to repay money that doesn’t actually exist. Our entire economic system seems to be based on the premise of robbing Peter to pay Paul.

Once again, this is a problem that is solved with the innovation in The Currency Paradox. Because there is not any debt associated to it, all of the currency produced is, technically, surplus money. In theory, any interest demands can be fulfilled without creating a deflationary effect because the money is not created with any associated interest or other debt demand.

If I’m correct, then continued note printing and money creation will only exacerbate the deflation issue. Interest rate increases by central banks will also make things much worse. Considering the nature of how most money is created, a solution may be difficult. It’s possible that the deflationary cycle is like a black hole and we have crossed the event horizon.

My Response to Randy Wray and Yves Smith of NakedCapitalism.com

My response to “Debt-Free Money” – A Non-Sequitur in Search of a Policy on Naked Capitalism. For some reason, it would not post on NC so I’m posting it here:

Let’s look at the coat check girl analogy for a second:

What happens if you give the coat check girl your coat and she hands you a ticket. But, instead of owing you back only your coat when you redeem the ticket, the coat check girl has to not only give you your coat but also part of another coat. Maybe a button, maybe a sleeve, maybe another whole coat. The only way it would be practical for the coat check girl to do her job would be to somehow procure other pieces of coats or whole coats to satisfy the redemption of the ticket. She may decide to steal pieces from the other coats that have been checked in or borrow pieces from a local tailor. But one thing is for certain … she will always run a “coat deficit.”

So maybe “debt-free money” isn’t an accurate term … how about “interest-free”? Because our system runs pretty much like the system that employs the coat check girl in my example, not the one in yours. All financial transactions involve a credit and debit. But not all involve interest payments. What if, when I redeemed my coat, the coat check girl didn’t have my portion of the other coat? Well, I might have an agreement in place that states that, for every month that she doesn’t return to me the additional part of coat that she owes, she is liable for another piece of coat. In other words, now her coat debt is compounding. Starting to see how this plays out?

The problem isn’t that our money has debt attached to it, the problem is that it has interest debt attached to it. Creating a money that doesn’t require interest debts to be passed along is what “debt-free” money is about.

“Debt-free” money only has to not preclude the motivation for profit. Otherwise, it makes a lot more sense than expecting a “coat+” whenever you redeem your coat check ticket.