The Opposite of Bankrupt
By Noni Mausa
The Opposite of Bankrupt
Some time ago I wrote about dollars as bizarre IOUs, with no names,
dates or specific obligations. They are free-floating promises, which
can be used to command the efforts of the other people who accept them
as valid.
I give you ten promises, and you give me a sack of potatoes. The ten
promises I give you fragment to a fine dust and disperse backwards in
time to command the efforts of growers, shippers, plastic bag
producers, potato breeders, researchers, and a vast pyramid of all the
people whose efforts, minor or major, permit a sack of potatoes to sit
there waiting for me when I enter the store.
Where did my ten promises come from in the first place?
Generally, I have them because I have spent time, exerted effort, and
focused my attention upon some task. In return, I received
promise-tokens, which I can use to command the fractional efforts of
other people. They may be near or far, known or unknown to me, in the
past or in the future, but these promises are nothing without their
ability to command the efforts of others and especially, to command
that effort anonymously.
Let’s look at bubbles and crashes with that in mind.
Trillions of promises evaporated practically overnight in the wake of
the 2008 real estate, stock market and investment collapses. But real
wealth — in the form of homes, land, crops, buildings, human skills
and knowledge, and the myriad other desirable and necessary goods –
was practically untouched. This created several important effects.
First, and inevitably, the real value of each surviving promise
ballooned – currency deflated drastically and almost instantaneously.
Huh? Isn’t inflation still piddling along at one or two percent? We
are warned about deflation and we have seen some, but not the steep
slither into the abyss that we saw in the 20s and 30s worldwide.
But the math is simple. If 10% of your paper wealth suddenly
vanishes, deflation (fewer dollars for the same goods) must happen,
it’s a definitional truth. But the key is that the dollar was
drastically inflated before the bubble, but the inflated bit was in
storage, not in circulation where it could inflate prices and require
wheelbarrows for trips to the grocery store. It doesn’t matter if
Marty (“The Artist”) Billingham prints up thousands of hundred dollar
bills, if he then buries them or burns them. These promises only
exist in circulation.
So, when the bubble popped, the potential value of each dollar
grew. If this maneuver had been executed by the Fed, perhaps to
help the federal budget by having to mint fewer coins and bills,
nothing would have changed. Pay would be less, prices would be less,
but proportionality would be preserved.
But no. Proportionality went all to hell, because of whose promises
got liquidated.
The rising tide lifting boats is a lousy metaphor because all boats
sit on the top of the water, at the same level. Imagine instead that
your wealth measures how far offshore you are. When the tide rises,
all boats are lifted, but when it falls some are beached right away,
while others float serenely. Even though the ocean liners technically
have 20 feet less water to float in, the difference is not important.
So when our currency deflated, whose hulls were stove in?
Well, we know that. Property values stayed the same, insofar as value
means “a warm dry place that isn’t a cave,” but ownership skipped from
homeowners to the promise merchants, who can now command the efforts
of new buyers. The equity in those homes is gone, whoever buys them
now has to start over and pay the cost-plus-interest from scratch.
Either the owners, or their heirs, take the hit for that tangle of
broken promises.
Pension plans took a big hit also. Wages and benefits, already
weakened, are still being hacked away at the roots.
In short, the effect of the bubble and crash was not to destroy
wealth, since all that wealth is still present or could be very
quickly rebuilt.
No, the real effect was to further shift the “ability to command the
fractional efforts of people” from the working majority to a
commanding minority. And so long as money is accepted, so long as
currency can be used to command that effort anonymously, the majority
is in a pickle.
Bankruptcy is the loss of liquidity, the loss of abstract leverage to
command the efforts of other people. Generally, this is a voluntary
process in which you confess you will never be able to provide
sufficient effort to compensate for the loans extended to you, and so
shed those obligations. It pushes you off the rocks and, hopefully,
back into a few feet of water where you can begin again.
What do you call the opposite – the ownership of more IOUs than you
could have ever earned, which can be deployed anonymously, which
multiply over time, and which can be created out of thin air if you
know the magic words? Who are you when you’re permanently anchored
over a Mariana Trench of money where no tide, however terrible, can
touch you?
Substitute all the words for money, as if in a game of FREUDIAN mad-libs; with BABY, GIFT, PENIS or FECES. It is easier to understand money with the substitutions.
In a country where $1=one vote, the fed’s gift of $8.95 trillion is equal to how many generations of American workers’ so-called votes? The Fed gave away more than Americans’ “promises” it gave away their voice in this so-called democratic so-called republic.
The ocean liners hit an iceberg………………………….. All at once
There were around twenty of them, who have writ too large to borrow from the central bank of the US. When the US central bankers hid M-3 we should have ducked.
These twenty sent huge amounts of M-3 all over the economy. The M-3 exchanged in vault slips for MBS, CDS and all kinds of paper which had no value. Deregulation helped here.
When the toilet paper was found out all the M-3 evaporated.
Then the Bush administration and Bernanke decided that the US taxpayer would replace all the M-3. Just like Ireland.
The US taxpayer will pay for their craziness. Taxes, unemployment, social security, inflation etc to cover for the crazies.
Ireland can not use theinflation tool.
So, going to Jefferson, banks are bad.
Get rid of the 20 lines from the fed printing presses and do let every one get a check book to draw on from the FR.
Would work out just as well.
N.M. Goodness, why did you have to do this? It’s not fare to an old man who just woke up, hadn’t even fonished his first cup of the morning. By the way, we have the same initials.
“Who are you when you’re permanently anchored over a Mariana Trench of money where no tide, however terrible, can touch you?”
Goldman Sachs?
Really, the analogy isn’t quite right. The bay is man-made. There is no Marianas Trench. Instead, some boat owners have such power that they can command jets of water under their boats to keep them from being grounded. Again, the answer is Goldman Sachs.
In marinas where the water freezes: some boat owners have slips with jets of warmed water under their boats to keep them from freezing and stoving in the hull.
These owners probably clip coupons from tax money funnelled from Goldman Sachs.
When I visited in Mexico a few decades ago, I was bemused to find that cafes and restaurants had two sets of prices — the price listed on the menu, and informal, lesser prices for the campesinos and the ordinary people of the town. Strangers, tourists and the wealthy paid the listed price, but the “little people” (as decided, I guess, by the cafe owner) paid less, far less.
Hard to do that north of the Rio Grande. But there is a real split between the dollar in my pocket and the dollar in the Waltons’ pockets. Does the lack of a “special menu” in N.A. has the effect of keeping the rich even richer because they can choose to pay higher prices, but don’t have to?
Good post reminds me of an aha moment in the cafeteria line at work few months ago:
Guy in front of me pays with one of the newer “funny looking” bills. Cashier banters with him over whether it’s fake. I’m looking on and then observe “Hey I’ll worry about which bills are counterfeit when somebody manages to explain to me why the real ones are worth something.” Knowing nods and chuckles all round as we return to work sipping our coffees…
The opposite of Bankrupt is Bank.
You know, back in my libertarian days (which I’ve long since abandoned as a failed philosophy), it was explained to me thusly:
“Imagine a situation where everyone becomes certain that there is an amazing mineral in the center of the earth that offers a nearly limitless energy supply. Companies develop equipment to locate and extract it. Companies invest in searching for it. The prices of theses companies assets are bid sky high, with the public scrambling to buy more and more shares. Banks and bondholders lend money to these companies furiously. At some point it is discovered that the mineral does not exist. Yet, based on the expectations that it did exist, people entered into all sorts of contracts (debt) committing them to pay sums that could only be realized if the mineral existed and was extracted. What then?”
The problem is that if we hold contracts to be sacrosanct, then everyone suffers and the economy stalls out. If contracts can’t be honored because the anticipated income flows don’t exist, then they can’t be honored. You can’t squeeze blood from a stone. That’s why we moved from debtors prisons to bankruptcy courts. That was a big improvement, but as Noni’s entry indicates, we’re not done solving the problem.
“That said, everytime I hear the politicians say “think of the debt that the “grandkids” are inherriting, I wish I could slap them accross the face in public, for all to see.”
You wrote this in a thread yesterday. Can you tell me what it means? I often see the “progressives” express antagonism toward the “right’s” line about “our grandkids inheriting our current debt.” But I never see the “progressives” explain their antagonism toward an idea that, on the face of it, makes sense. If the government is running up a large debt, it has agreed to repay that money, plus interest that is compounding. It seems that it will take a large taxation, maybe eventually economically crippling us, in order obtain the revenues for that. Are you predicting for GDP or something to compound so fast that repaying the mounting debt and its compounding interest will be trivial? Can you explain?
I sometimes try to argue with conservatives that the debt is trivial, but my only argument is to the authority of progressive economics buffs. I can’t actually explain it myself. (I am being sincere.)
Don’t blame “the Fed” or the government or any other dept of that government. Those agencies are made up of people who follow the directives of other people who we elected to certain priviledged positions which allow them to determine how the game is played. Blame the Obamas, the Boehners, the McConnels, etc. Then turn to the mirror and blame yourselves or your friends and neighbors for being so indiscriminate in choosing those “elected” representatives.
Excellent insight, Noni! NancyO
jon boin
let me start. when the politicians cry deficits, they are often talking about social security.
which is not in deficit, and will never be in deficit. a “projected deficit” exists in the future if and only if we are too dumb to raise our own payroll tax 40 cents per week each year to pay for our own longer life expectancy. so that’s one reason to want to slap them, hard, in the face.
the real deficit could be paid down by returning the tax rates to what they were before the Bush tax cuts that were going to pay for themselves but didn’t. but the same politicians who are crying about the deficit… and blaming, lying about, social security, want to continue the tax cuts. if not cut even more (payroll tax holiday anyone?). another reason to slap them across the face. but don’t expecxt them to say, “thanks, i needed that.”
meanwhile there are good economic reasons to suspect that the deficit will eventually correct itself by growth in the economy. li personally wouldn’t count on it, i prefer raising taxes for the “deficit emergency.” but in any case the huge horrible burden on our children that will collapse the economy is fiction. a horror story to scare the children. as noni points out, we still have the workers and the factories and the land and the knowledge. or did until we exported them to china in return for cheap plastic toys….. all arranged by the same politicians who are crying and carrying on about “the children.:
i suggest you try very hard to think through all of the propaganda you are hearing. it won’t be easy, but eventually you should see the Big LIe for what it is.
and yes, the goddam liberals are as bad as the goddam right wing crazies about this.
well, if you paid for your coffee with it, it was worth something. that’s all money is.
I have seen in articles about Euro bank problems and the excuse the Irish government, almost as inane as the US counterpart, decided to bail out banks which were illiquid, and let the very few bankrupt banks go down.
I do not know the Irish government called any of their banks “bankrupt” just illiquid so the Irish got to cover their liquidity, which was I would say bankrupt.
Any insights?
rich s
i think you are half right. money works because we count on being able to use it to exchange for real goods and services. but we need an escape valve so that when the money lending system is corrupted (technical word i learned from my computer repair person) we can default gracefully with minimum real damage all around. i think we have such a system, but it is politcally encumbered, and of course politically lied about. it’s complex because you need both… the faith that it’s real, and the knowledge that in a pinch it’s all an illusion. certanly you know that when you lend money to your brother in law you may never see it again. the bankers and the politicians are telling us that when the bank lends us money to pay three times what a house is worth (money that ultimately is paid to the bank) that it is an affront to god that we might not pay, or pay slow, and god will punish us by taking away all our ability to work for our current needs… so we can send money to the bank which will use it for the pleasure of counting it.
Jonbo in AR,
The talking heads’ deficit is blither!!
No one addresses how much more than the deficit is raised and obligated.
The reported deficit is ONLY the difference between cash required and cash outlays of the US government each accounting year. It is the cash the US treasury raised by borrowing: from the public and sovereign wealth funds in form of T bills and notes, from the fed reserve printing presses, and from payroll tax receipts in excess of outlays for SS, Medicare, OPM retirement etc. The deficit therefore does not fully or rationally reflect the amount of borrowing the US Government needs to do each fiscal year.
The debt of the US represents taxes not collected that are deferred to someone else, like the grandkids.
That said, the US needs to stop talking deficit and talk about debt.
Yes, the debt incurred now is owed by the social contract going off to the future as deferred taxes.
That is why I propose that Bush tax cuts be ended because they deferred taxes and need to be paid back…………………..
As coberly notes the emphaisi on deficits leads to ignoring debt and the rationalization that cash don’t need to be raised to cover the 4 T in US debt to itslef in the form of accumulated borrowing from excess payroll tax receipt.
There are only two shells and one pea.
It is not gambling it is larceny at play here.
2 fisherman from the same village go out to sea. Fisherman A catches 6 fish, which is twice the number he needs to feed his family. Fisherman B catches no fish but gives Fisherman A three promissory notes in exchange for 3 fish, fish that would otherwise rot.
On day two the reverse happens and the 2 fisherman are back to even. This economy improves the efficiency of the village.
But if Fisherman B had defaulted on his promise there is more than just an economic inefficiency, there is a breakdown in trust. That lack of trust could, and probably would, lead to Fisherman A not continuing to work beyond the point when his own needs are met. Why bring 3 fish home to rot when they are better left in the ocean for another day? The point being, that promissory notes are a must.
Now though, the ‘village’ has several billion citizens and the all-important trust has eroded away to a pittance of what it needs to be for the system to function efficiently. The promissory notes though that are now eroding the necessary level of trust, are those being exchanged by nations in payment for trade goods. The current currency issues between China and the US for example are about ‘trust’. Most Americans find it difficult to accept but China is the fisherman who is catching extra fish… and the US is providing only promissory notes of dubious value. Notes from a lazy, overpaid, and belligerent fisherman must always devalue as the demand for his IOUs becomes overwhelmed by supply. And of course efforts such as the Plaza accords, and the more recent QE ploys, followed by statements such as: “it is our currency, but your problem”, have nearly eliminated trust between nations altogether.
The global financial system is failing as a result of too little trust. But, as if karma plays some role, or perhaps Mother Nature is merely protecting herself, the lazy and unproductive nations that relied to heavily on paper-promises will be the nations that will now pay the highest price for their shortcomings.
I’m going to try to absorb what y’all are telling me. Right now I have to go off and do some work. One question: when they scream about the deficit (I understand they’re disingenous. They didn’t peep when Bush was running it up.), are they not implying the debt? That is, the deficit is important because that’s the amount the debt increased this year which SOMEONE’S taxes will have to pay for.
Thanks for your kind responses.
Also, with the economy weak, is there not an argument for extending the Bush tax cuts for another year or two?
$1 = 1 vote describes a plutocracy, not a democracy. The Fed is not to blame for making the U. S. a plutocracy (if that’s what it is). The Supreme Court bears a lot of the blame, by equating money with speech. The political servants of the rich bear a lot of the blame, as well.
ilsm: “The ocean liners hit an iceberg………………………….. All at once”
Better metaphor, perhaps: The iceberg was a mirage, and they crashed into each other. 🙂
Johnbo in AR: “I often see the “progressives” express antagonism toward the “right’s” line about “our grandkids inheriting our current debt.” But I never see the “progressives” explain their antagonism toward an idea that, on the face of it, makes sense.”
It does seem to make sense, doesn’t it? And that same argument was used against the New Deal, to no avail. The gov’t spent and spent. And the debt was rolled over, not paid off. So what about the chldren and grandchildren of the Great Depression, who “inherited” that debt? How bad was the burden of that debt for them?
Answer: They did not feel the burden of the New Deal debt at all. Instead, they enjoyed prosperity and the fruits of New Deal spending, including parks, dams, roads, affordable electrical power, the fact that they or their parents did not starve during the Depression, literature and arts, etc., etc.
It is the real economy that matters. The gov’t deficits of the 1930s meant that much of the human and economic potential of the U. S. would be realized and not wasted. Had it been wasted, the results would have been worse for the next generations.
Households, local and state gov’ts have to concern themselves with finances, because they are not the source of the currency. The Federal gov’t is the source of the currency, and therefore can always afford to concern itself with the real economy. The fact that many politicians put finances before the real economy leads to the tail wagging the dog.
Warren Mosler ( http://moslereconomics.com/ ) talks about these things on his blog and in his recent book. 🙂
“Some time ago I wrote about dollars as bizarre IOUs, with no names,
dates or specific obligations. They are free-floating promises, which
can be used to command the efforts of the other people who accept them as valid. . . .
“Where did my ten promises come from in the first place?”
Ultimately, they came from the Federal gov’t. The gov’t promises two things: First, to exchange those IOUs (U. S. dollars) for an equivalent number of dollars. (They used to promise to exchange paper dollars for coins, but not since 1971.) Second, to accept those IOUs in payment of its taxes.
During the Revolutionary War, the Continental Congress, as we all know, issued Continental Dollars, backed by “the full faith and credit of the Continent”. We know how much that faith and credit ended up being worth. The Continental Congress was a funny kind of entity, not exactly a government. Benjamin Franklin advised the Congress to back its money by taxation, or, as had been done in Pennsylvania for its paper currency, by a land bank. No state was willing to promise to accept Continentals as payment for its taxes, nor was Congress as a whole. So the Continental Dollar ended up as a currency without any backing. And we all know about its hyperinflation.
Now, the promise of the gov’t to exchange dollars for dollars may not be worth much, but the promise to accept dollars in payment of taxes is very important. 🙂
Yes, governments issue currency and then accept it as taxes, but that in itself isn’t very useful unless a) the currency is used for many more things than simple taxes, and b) the currency and its issuance is firmly regulated.
That which makes the unreal, real, is the pledge of the government to support the promises — contracts, currency, mortgages and such important possessions and exchanges. And, in the final analysis it is the governmental power to use force to support such contracts or punish (or at least discipline) transgressors, which gives the gauzy dollar its weight. The force might be something as mild as bailiffs siezing property or closing down shady businesses, or as extreme as G-Men with machine guns, or even a Civil War. But it must be there.
If regulation does not put fraud artists in jail, sieze their ill-gotten gains and clear the field for honest agents, then it isn’t a government you have anymore. At least, not a democratic one.
But you have to admit it would be a very terrible thing if the government inflated away our purchasing power, incomes, and savings, and then demanded payment of taxes in gold!
No, in this issue we need demand.
Extending tax breaks for rich will likley increase saving and debt, not demand.
The problem is demand!
Hey, really Economics Blog. *subscribed*
Just letting you know about my http://the-prospective-economist.blogspot.com/ and mainly for the younger economists.
Thanks, Prospective Economist.
jon boin
i agree with ilsm. i don’t think the n tax raise in a recession idea works any more. we have tax cut ourselves to death already. we need to pay some bills and get on with it. raising taxes will just take idle money out of the accounts of those who aren’t using it and put it to work. hopefully creating jobs, but it’s looking as if that will take more intelligence than we have got from our economic advisors. who seem to think factory workers can just be retrained to become, say, economists, after their jobs are shipped to china.
i think you are right about defict = debt, but sometimes i get into pointless arguments with people about words. to which i say, try to look at what “is” not what the words are.
i would also part with ilsm, perhaps, we need a tax increase across the board, so the rich will pay their share, and even us poor folks can pay for what we need, like social security and medicare.
min
you are right, but given the politics of today, i think a small tax increase would be salutary.
love
yeah, you are right, but the world is more complex than that. as i hoped i pointed out, we need the trust. we also need an escape…. so you don’t go to fisherman B’s house and break his thumbs when he can’t repay you after a week of bad luck. also we need to know that the deficit is not going to kill us. at some point the creditors stop lending. then we learn how to make do without borrowing. can be done. has been done. might be good for us. eventually the creditors will want to lend to us again, because that’s how they make their money, even if from time to time they have to write off some debts as bad investments.
min
and that’s why hamilton insisted upon paying that debt, face value in full. because even though it rewarded speculators, it did establish the government’s full faith and credit. which ran pretty good until the congress started talking about defaulting on the SS bonds.
noni
i agree sorta. but as long as the government will take its own money to pay taxes, that money can be exchanged among citizens for any purpose whatsoever. doesn’t need force. bad debts can be written off as experience. i have done so often enough.
please note that a bad debt is not a failure to honor the currency. its a failure to honor a contract for which no currency may have changed hands at all. you are suing the bastard because he failed on his promise to deliver currency.
Dale,
Breaking thumbs though is not necessary, Fisherman B will become a better fisherman when he becomes hungry. He will also find that the fish that he provides himself taste better than those he borrowed.
.
“I often see the “progressives” express antagonism toward the “right’s” line about “our grandkids inheriting our current debt.” But I never see the “progressives” explain their antagonism toward an idea that, on the face of it, makes sense.”
I’ve come to AB late for this, but I simply have to comment. My reaction to the “kids and grandkids” line goes further than “slap them…” As a non-economist, my reply is always this…
We have “kids and grandkids” NOW. Our “kids” will have a severely decreased lifetime income simply by virtue of this Collapse (having to take lower paying jobs with fewer prospects -if they can find one at all- in order to keep food on the table is just the beginning). Even in a “normal” recession, those who suffer unemployment or take jobs for which they are overqualified, are still suffering lower income 10 years later compared to those who start out in good times.
Our grandkids are in school NOW. (An awful lot of pols who use that line are my age, too) If we gut their education because “we can’t afford it,” what will they become? If their parents, already un- or under-employed, lose their unemployments benefits, their food stamps, their child care subsidies that allow them to work, their homes, will it matter that the debt might be lower in 15 years? Are we willing to sacrifice one, and possibly two, generations in order to “balance the books”?
It would appear that the deficit hawks are willing. Of course, I suspect they believe their own “kids and grandkids” won’t be paying “the price” of their actions. In my darkest moments, I find myself wishing I could be a fly on the wall when they find out what happens when you smash the machinery, let the means of production and transportation rust and crumble, and eat the seed corn.
I think they believe that the very wealthy will be just fine, they will have enough of those “IOUs” to “keep the economy going,” and the rest, whether they “make it” or not, just don’t matter. It’s short-sighted, cynical, and avaricious, but that’s nothing new. When it comes to squandering capital, they much prefer it be the human kind.
“The rising tide lifting boats is a lousy metaphor because all boats sit on the top of the water, at the same level.”
…and the argument that it’s “unfair” not to extend tax cuts for income over $250K implies that we’re all starting on level seas, that some of us aren’t already above that Mariana Trench while others of us were smashed on the rocky shore years ago.
“Who are you when you’re permanently anchored over a Mariana Trench of money where no tide, however terrible, can touch you?”
You’re somebody with lots of money – and a boat.