Relevant and even prescient commentary on news, politics and the economy.

Currency is Equity, Equity is Currency

This is utterly brilliant:

Twitter / izakaminska: Why equity is a type of privately issued currency

Steve Randy Waldman has been here before, with the idea that currency issued by government (ultimately through deficit spending) is “equity” in government, or in America. But this reverses it beautifully, with the notion that private equity issuance is also currency issuance. Google stock is currency.

I won’t recap the argument here; you really need to read it. Just some thoughts:

I think different words might help make it clearer. I would say that there are many units of exchange in the world —  dollar bills, t-bills, stock shares, etc. Financial assets. They have various characteristics, a key one being limits on what they can be exchanged for. In general when we say “currency” we mean physical tokens that can be exchanged for (small quantities of) real goods. But we confuse things by not realizing that “currency” is a somewhat vaguely defined subset of “units of exchange.”

(Key distinction: the “units” I’m talking about are not measurement units like inches, degrees, or “the dollar” — units of account. Rather, in the sense of discrete units, chunks. As when a factory produces a certain number of units, which can have their value described relative to a unit of measurement/account, such as the dollar. More on the distinction between “unit” and “medium” of account/exchange here.)

You can’t buy a car or a government bond with quarters. So are quarters currency? Likewise, you can’t buy a pack of gum with a treasury bond — but you can use it to buy Fed reserves (if you’re a bank). Is the bond currency? You decide. But both quarters and bonds (and Google shares) are units of exchange. (This is why I’m still struggling with JP Konig’s “moneyness” concept: it seems to hinge on a single axis of “liquidity,” when in fact different units of exchange are differently liquid.)

We can also call these units of exchange “financial assets.”

I do not define a “bushel of apples” as a unit of exchange or a financial asset, but as a unit of commodity. Ditto an ounce of gold. Because in my definition:

1. Units of exchange/financial assets cannot be consumed by humans to produce human utility, and

2. Their creation requires no (or vanishingly little) input to production.

Returning to a previous (excessively long) post, these units of exchange/financial assets embody exchange value — money. Hence (alert: precise definition here) money is exchange value as embodied in financial assets. Money does not, cannot exist, absent such embodiment. A bushel of apples does not embody money: That bushel has exchange value, but the value is not embodied in non-consumable, only-exchangeable form.

Not sure how much this will help others, but it’s working for me.

Cross posted at Asymptosis.

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Do Savers “Take Resources out of Society”?

Revisiting a previous post, “Saving” ≠ “Saving Resources”*, wherein I question Scott Sumner’s notion that people who spend and consume more (save less) take resources “out of society.”

Try this:

John works for Debbie, and Debbie works for John.

They each start out with $100 in dollar bills, $200 total.

They pay each other in dollar bills: $100 a year, each direction.

Between them, through their labor, each year they produce $200 in real resources — things that humans can consume to derive human utility (or to produce more consumables in the future).

But: This year Debbie decides to save money, so she doesn’t hire John for as many hours, and only pays him $80. She leaves $20 sitting in her drawer; she doesn’t circulate it this year.

At the end of the year Debbie has $120, and John has $80.

Debbie has produced $100 worth of real resources, and John has produced $80 worth. $180 total, instead of $200 the year before.

Did Debbie “take those $20 in real resources ‘out of society'”? (Or was it John — lazy, feckless soul that he is — who didn’t do that $20 in resource-creation?)

We can certainly say that Debbie’s decision to leave the $20 sitting in her drawer instead of circulating (spending) it caused “society” (Read: John) to produce less resources than it would have if she had circulated (spent) it.

Is Debbie a “taker”?

Cross-posted at Asymptosis.


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Unemployment hits new highs in Spain and France

As if there were not already abundant proof of the failure of austerity in the eurozone, the BBC reported yesterday that both Spain and France have hit new unemployment milestones.

In Spain, unemployment has jumped from February’s 26.3% to a first-quarter rate of 27.2% (implying an even higher figure for March). In March 2012, it was “only” 24.1% (see source in table below).

In France, there are now 3.2 million unemployed, more than at any time since the country began keeping records in 1996. Complete EU unemployment data for March should be released in early May.

For a fuller picture of the continuing deterioration of the situation in the European Union and the eurozone, the unemployment rates tell a stark story.

Date     Eurozone     Spain     Greece     Portugal     Ireland     UK     USA   EU-27

3/2012   10.8%         24.1%    21.7%     15.3%      14.5%    8.2%  8.2%   10.2%

2/2013   12.0%         26.3%    26.4%     17.5%      14.2%    7.7%  7.7%   10.9%

Note: Greece and UK figures are for January 2012 and December 2012, rather than March 2012 and February 2013

Sources: Eurostat, 2 May 2012, for March 2012; Eurostat, 2 April 2013, for February 2013; Bureau of Labor Statistics for U.S.

Moreover, it is important to note that despite drastic budget-slashing, in none of the EU countries did debt come under control, even for Ireland and the UK, which have managed some slight growth over the 11-month period. Using this handy BBC interactive tool, we can see that Spain’s debt/GDP ratio increased from 69.3% in 2011 to 84.2% in 2012 (Wait, that’s under 90%! What’s happening?), Greece declined from 170.3% to 156.9%, Portugal increased from 108.3% to 123.6%, Ireland increased from 106.4% to 117.6%, and the U.K. increased from 85.5% to 90%. In fact, just six short years earlier, Ireland had a debt/GDP ratio of just 24.6%. The Celtic Tiger, favorite of conservatives everywhere, has truly crashed and burned.

Given the Spanish and French figures, look for bad news for EU unemployment next week. Despite the continuing austerity fail, Republicans and some Democrats continue to push for deficit cutting here, and will maintain a steady drumbeat. But, like Reinhart and Rogoff, they all deserve the Colbert treatment.

Cross-posted from Middle Class Political Economist.

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I Told You So uh sort of

The latest estimates of the cost of bailing out Fannie Mae are dramatically lower than previously reported estimates.

Because of accounting rules, Fannie and Freddie would be forced to recognize the increase in value as profit — and turn it over to taxpayers. Fannie has suggested that might occur this spring — and said it could turn over about $60 billion. Freddie appears to be behind in the process.


I don’t understand the actual issue “tax assets” but still claim I, more or less, told you so (maybe more less than more as those posts are about TARP but the issue is similar).

The key point is that Fannie Mae will transfer $60 billion to the Treasury but this won’t make another bailout necessary.  The reason is that, in normal times, Fannie Mae gets a normal return on its assets.  Such a return is much higher than the rate the Treasury pays.

The cost of bailouts was, by law, adjusted for risk so, unlike everything else, it wasn’t evaluated at the expected effect on the national debt after 10 years but rather that effect plus an additional cost from the Treasury bearing risk.  There is no good reason to count this cost. There is a very strong bad reason that if it weren’t required some people would write that the Treasury could eliminate its  debt problem by selling more bonds and buying equities.

I write that already.

To be Frank (and Sloan and Quiggin) the determined effort to hide the fact that partial public ownership of the means of production would be a trillion dollar better than sure thing caused absurd estimates of the cost of bailouts.

The main point of the article is that, since the net debt was foolishly over estimted, Republicans won’t be able to play debt ceiling chicken for a few more months.  But it also shows, again, how public ownership of risky assets makes the country richer as they are worth more to the federal government than to any other entity.




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Debt and Growth III

I’m going to try to make this post brief and comprehensible.  It contains no information not in an earlier post but I delete a whole lot of distracting data.

The question is does the Reinhart Rogoff (hence R-R) data set on public debt and real GDP in 20 rich countries post WWII contain evidence that a debt to gdp ratio higher than 90% causes lower real GDP growth.  My answer is no it does not contain any such evidence.

Note the very very low bar.  I claim no evidence of a bad effect not just no evidence that 90% is a critical level at which additional debt becomes extremely bad for growth but no evidence of any effect on growth at all.

Why is my result different from almost everyon else’s (except for Dube’s) ?  Well I take the very very first step to address causation — I run a regression including lagged real GDP growth.  This is the first standard totally unconvincing way to try to determine causation from historical data.  A significant estimated effect of debt would mean that debt “Granger causes” low growth where Granger cause is the English translation of post hoc ergo propter hoc.




the dependent variable is annual real GDP growth.  The first coefficient is on the debt to gdp ratio in percent rounded down to 90 if it is over 90.  The second coefficient — the coefficient of interest — is the ratio minus 90 if it is over 90 or zero if it is under 90.  This coefficient is an estimate of the effect of further debt once debt has already reached 90% of GDP — exactly the effect of interest.  l1drgdp is the one year lagged rate of real GDP growth. _cons is aconstant term.

The point is that the coefficient on debtgdpmin90 is actually very slightly positive.  There is no evidence in the R-R data set that debt to GDP ratios greater than 90% are worse for growth than a debt ratio of 90%.


Here is the stata do file which generates the result.  It uses the R-R data set as processed a bit by Herndon et al and available here 


use C:\rjw\Papers\Peri\RR-processed.dta

quietly tab Country,gen(count)
gen cntry = count1+2*count2+3*count3+4*count4+5*count5+6*count6 + 7*count7 + 8*count8+9*count9+10*count10+11*count11+12*count12+13*count13+14*count14+15*count15+16*count16+17*count17+18*count18+19*count19+20*count20

gen l1drgdp = dRGDP[_n-1] if cntry[_n-1]==cntry

gen debtgdpto90 = debtgdp + (90-debtgdp)*(debtgdp>90)
gen debtgdpmin90 = debtgdp-debtgdpto90

gen debtgdpto30 = debtgdp + (30-debtgdp)*(debtgdp>30)
gen debtgdpmin30 = debtgdp-debtgdpto30

reg dRGDP debtgdpto90 debtgdpmin90 l1drgdp




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All Currency is “Fiat” Currency

Or to be more precise, all currency is consensus currency.

Units of exchange (dollar bills, great big rocks at the bottom of the ocean) can have value merely because everyone in a community agrees that they have value. That value need not be declared, defined, or enforced by by some “fiat” authority with powers of (ultimately physical) coercion — though it often or usually is.

That’s one big realization I came to from Graeber’s Debt: The First Five Thousand Years. (Though he doesn’t state it so succinctly, and I’m not sure he’d agree with it.)

Think of gold coins. If their exchange/consensus value is (enough) less than the (commodity) value of their metal content, people will melt them down and sell the metal. Arbitrage happens. Their consensus exchange value must be higher than the exchange value of their constituent metal, or they’re simply not currency any more; they’re chunks of commodity.

That differential between currencies’ consensus value and their commodity value is their very sine qua non: the thing that makes them what they are, without which they would not be currencies.

So why gold coins? Because the next city-state over, or the one 500 miles away, might not have the same consensus about those coins’ value as in your city-state. But there is a much wider consensus as to the value of gold. As far as they’re concerned, your ruler’s gold coins have the value of their gold content, and that’s all. But at least they have that value, because the gold-value consensus is widespread. 

So if you’re a trader looking to buy 1,000 yak skins from the remote Azbakalians, you can carry a bunch of gold coins there and trade them instead of carrying 1,000 amphoras of lima-bean oil. Yeah, you sacrifice the extra consensus value you’d have if you instead used those gold coins to buy things locally, but the cost of transporting all that oil is higher than that loss.

So is a physical one-ounce lump of gold a unit of “currency”? I’d say no. Because while the consensus value of gold might be different and might change at different times and places, there is no particular time and place where it has two different exchange values: its local consensus value and its foreign-trade commodity value. It only has its commodity value.

How does this work for cigarettes in a POW camp? They’re obviously used as some type of currency, as units of exchange. I’d suggest that because some people smoke and some don’t — some people value them highly for the utility their consumption can deliver, while others have no use for them — their average commodity value is lower than their average exchange/consensus value. (Also: new cigarettes are constantly being delivered and shared out in some way by the Red Cross or whoever, and they’re constantly being consumed. This is never true of coins or paper bills, which can’t be consumed.) This raises issues of distribution, power, wants, needs, and satisfactions, which I’d love to hear discussion of by my gentle readers.

Cross-posted at Asymptosis.


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German tax enforcement paying dividends

I have long advocated that the United States should follow Germany’s example of aggressive pursuit of tax evasion, in particular its practice of paying informants for account information from secrecy destinations like Liechtenstein and Switzerland. The German Parliament’s upper house (Bundesrat) rejected a deal in November that Prime Minister Angela Merkel was willing to sign with Switzerland that would have allowed German account holders to pay tax anonymously. (As I reported on April 12, automatic exchange of information is rapidly becoming the standard to which even Luxembourg will adhere, so Switzerland will come under great pressure to do the same, thus ending bank secrecy.)

Now, Naomi Fowler of Tax Justice Network points me to new enforcement actions based on leaked account information. Last week the southwest German state of Rhineland-Palatinate conducted searches of over 200 homes in connection with alleged tax evasion. The raids were based on a CD with data on thousands of German citizens with Swiss bank accounts, for which the state had paid an informant 4 million euros ($5.2 million). However, tax authorities estimated that they would have an over 100-fold return on this investment, expecting to collect 500 million euros ($654 million) as a result of the investigation.

Investigators in Rhineland-Palatinate stated that they were investigating Credit Suisse and its German subsidiaries for assisting in tax evasion as a result of data on the CD. This comes on top of a 2011 settlement by the bank to pay 150 million euros for facilitating German tax evasion.

How often do governments get a 100-fold return on investment? The U.S. routinely pays drug informants; it should be more aggressive in finding tax evasion informants.

Cross-posted at Middle Class Political Economist.

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Defining Rich VII: Explaining Income inequality in pictures

I had my hair cut last week.  It’s a big event as it happens about twice per year.  While there I always get into political conversations with the lady cutting my hair.  This time, as often it was the economy.  Her position still is that the individual citizens collecting welfare are effecting her income.  We’ve discussed this before.  So, I used my simple math of $100 dollars and 100 people and 9% to the 1 person and the remaining 99 splitting what remains.  I then note the current split of 24% to the 1 and the 99 splitting what is left.  Easy?

Unfortunately, it did not resolve the issue.  Her question was: You don’t think the welfare people are effecting this?  So, I asked her to explain to me just how someone collecting welfare (we are not talking corporate welfare) could be the cause of her lack of share of the overall income?  This is not a laughing matter.  It shows just how strongly the conflation has been made of associating the indigent population as the cause of ones financial condition, namely the money in their pocket.

This got me thinking.  Maybe numbers are just not enough.  Maybe using 100 dollars and the fact that after the 1 gets about $9 as of 1978 the other 99 get $0.92.  Shift the split and it’s $24 vs $0.77.   How is that relative to a median income of today?  And here I’ve been thinking I was keeping it simple.

So, I have upped the numbers.  $10 million.  100 people.  This produces the following:

$10 Million 9% Share 24% Share
The 1 Inc. $900,000.00 $2,400,000.00
The 99 Inc. $91,919.00 $76,768.00

That is quite the shift of the 1’s income.  In fact it is a 166.7% increase simply due to changing how the pie is cut.  The rest of the people, the 99 get 16.5% less.  No one worked harder, no one worked less.  We just cut the pie differently.

It is that simple.  It is that fundamental.

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Soooo … Eric Posner’s Angling to Ghostwrite David Brooks’s Columns. Or At Least to Fully Shed That John-Yoo-and-I Stigma. Fine, But Don’t Stigmatize ME In the Process. [FORMAT-CORRECTED AGAIN]

When Dzhokhar Tsarnaev was arrested Friday night, the celebration was instantly overtaken by an ideologically charged debate. Liberals argued that the government must respect Tsarnaev’s constitutional rights, by which they meant that he should be treated the same as any ordinary criminal suspect—informed of his Miranda rights, supplied with a lawyer, presented to court as soon as possible. The subtext was that the treatment of Tsarnaev would refute yet again the hated Bush administration’s claim that it needed expansive war powers to fight terrorists. Conservatives by contrast, notably Republican Sens. John McCain and Lindsey Graham, argued that the government should classify Tsarnaev as an enemy combatant, and thus deprive him of the rights of ordinary criminal suspects. For the left, the Tsarnaevs are examples of “vulnerable Muslims” driven to extremes by President Obama’s immoral drone war; for the right, they are foot soldiers in a civilizational war. …

Neither the knee-jerk liberal nor the knee-jerk conservative response appreciates all of these underlying dilemmas. For liberals, the constitution is a fetish to be stroked at times of peril; it will protect us, whatever the stakes. They forget that criminal procedural rights were cobbled together over decades by fallible judges, who were responding to the needs of the time. What might have been appropriate during the civil rights era, when police used criminal law to suppress protesters and torment African-Americans, may not be appropriate for an age of terror. …

The isolation of terrorist suspects is hardly a new idea; it was used effectively in the 1970s by Germany, Italy, and other European democracies to defeat terrorist groups like the Red Army Faction and the Red Brigade. Here and now in the U.S., there are several advantages to this approach. It treats in the same manner anyone who engages in terrorism or mass killing and does not single out Muslims, who are burdened by the legacy of the declaration of war against al-Qaida. It gives the police broad powers to deal with cases of extraordinary violence without granting them similar powers for ordinary criminal investigations. It avoids any reference to war or martial law, skirting the massive legal and political complexities associated with war powers. And because Congress would make the rules, and judges would oversee the system, the courts would likely hold it constitutional.

The New Law We Need in Order to Deal With Dzhokhar Tsarnaev: Congress should authorize the isolation and detention of suspected terrorists., Eric Posner*, Slate, yesterday

After reading that article this afternoon, I posted the following comment to it:

For the left, the Tsarnaevs are examples of “vulnerable Muslims” driven to extremes by President Obama’s immoral drone war; for the right, they are foot soldiers in a civilizational war? Really? For the entire left, Prof. Posner?

I’m a regular writer on a blog called Angry Bear, a left-of-center economics/politics/legal-issues blog, and yesterday, at the request of the guy who runs the blog, I posted a lengthy piece on these issues, at [this link; link corrected 4/25]. I began writing for that blog three years ago at the request of the guy who runs it, and a few of my pieces have been linked to or tweeted by some heavy-hitters. Including Paul Krugman (once), Brad DeLong, several times, and Naked Capitalism, also several times. (And occasionally by non-ideological blogs and tweeters as well, although that doesn’t matter here.) Suffice it to say that I’m of the left. Have been all my life. Almost literally; by the age of about six, I knew about McCarthyism, courtesy of my parents!

So I’m a good test case, and I invite Prof. Posner to read my blog post (if he can bear the thought and expend the time to read something written by a no-name) and point out where exactly I said or implied that I view the Tsarnaev brothers as examples of vulnerable Muslims driven to extremes by President Obama’s immoral drone war. And, since he won’t, I invite all you readers here to do that. I wish you luck.

Posner spent the early and mid 2000s angling (I think) to join his father as a judge on the Seventh Circuit Court of Appeals, an effort that included co-authoring with that well-known civil libertarian John Yoo (google him, folks, if you don’t know who he is and therefore don’t get the reference and characterization). Posner has spent the time since his dalliance with Yoo trying to salvage his own reputation, fairly successfully, and this article is, I think, another piece in his ongoing attempt to rid himself of the Yoo-association taint; you never know when a Republican might win the White House next, and anyway, well, y’know.

But the next presidential inauguration is nearly four years away, and so to bide his time he’s apparently now auditioning as David Brooks’ ghostwriter. Brooks really, really does need one, and Posner has that sweeping-generalizations-and-categorizations thing down pat, which is a good start. All he needs now is to practice up on the faint-correlation-equals-definitive-causation thing. Or at least the a-series-of-statements-of-fact-invites-a-non-sequitur-conclusion technique, a David Brooks special. And no one will be the wiser that the columns are ghostwritten.

As a liberal, I can also attest, by the way, that it is not a characteristic of ours to forget that criminal procedural rights were cobbled together over decades by judges. Nor to forget, or not to, um, notice, that judges are fallible. We notice that; trust me. Some of us even think that some judges are deliberately fallible. In fact, some of us are pretty sure of this.

As for what’s appropriate for an age of terror, one thing that I’m pretty sure is not is that any statute passes constitutional muster because Congress would make the rules, and judges would oversee the system. Congress sort-of-normally makes the rules in detailed statutes, and judges sort-of-normally oversee the system that statutes establish, at least since Marbury v. Madison. So I don’t know why the courts would likely hold it constitutional because Congress would make the rules, and judges would oversee the system. At least until Professor Posner becomes a member of one of those courts.

And just to be clear, I do not consider the Tsarnaev brothers examples of vulnerable Muslims driven to extremes by President Obama’s immoral drone war. This even though that may well have been why the older brother was able to gain the younger brother’s assistance. And even though I, too, believe that the drone war is immoral. And that there is no legitimate reason for this country to be involved in Afghanistan militarily, and that there has been no reason for a decade or so. It already looks likely that the younger brother was vulnerable to his older brother’s manipulations, probably mainly concerning the drone wars, but that the older brother had an agenda apart from the drone wars.***


*Eric Posner is a longtime professor at the University of Chicago Law School and a son of Seventh Circuit Court of Appeals judge Richard Posner.


**I had to fully edit the format of this piece once and then still make another formatting correction, because I’m still having trouble getting used to our new platform.  After the second edit, the title disappeared, so I had to edit this a third time. Aaargh.

Steve Roth, Dan Crawford, and reader RJS have helped a lot via emails–thanks, guys!–but I’m still semi-clueless about it all.  Apologies, readers.  I think I finally got this one right. 4/23 at 3:04 p.m.


***In light of my exchange with Woolley in the comments below, I just amended this paragraph in  my Slate Comment and here. 4/23/13 at 4:19 p.m.


Wellll, as I learned the hard way from perplexed emails to me about this post, our format here in WordPress does not distinguish blockquotes clearly enough.  JazzBumpa, for example, said he wondered who had poisoned me–until he finally realized that that stuff was a blockquote.  [Poisoned me?  More like kidnapped me, and then waited for Stockholm Syndrome to kick in before he allowed me to post anything.]  The solution, for the moment anyway? Italics.










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