Tuesday, May 22, 2012

Over-analysis of a flawed concept. Is the occurrence rising exponentially in our populace?

Featuring work by a Japanese-funded US historian, the St. Louis Fed suggests Americans have forgotten how to save, and must re-learn to do so.   So they're saying we've had a national stroke, and rather like a CNS with aphasia or ataxia, must once again learn how to do a basic function.

The New American Challenge: Learning To Save To Build Wealth

Their suggested remedy?  Reopen all the post offices we just closed down, to host postal savings banks, like the Japanese do, to help distributed Americans hoard small amounts of fiat currency.

Let's get a second opinion on that diagnosis, and some alternate options on therapy.  Okay, they may be onto something with the analogy of a stroke.  However they may be thinking of the wrong area of the group-brain that was affected.  There's more evidence that it was the emerging "higher-order" policy area that for some reason suddenly underwent significant, localized brain death.

Compared to the last time we had a depression this deep & prolonged (1932), several things have changed.

1) our aggregate population has more than tripled, increasing an already significant, organizational scaling task;

2) our population today features dramatically increased transaction options & frequency, thereby compounding our scaling task;

3) to meet that ballooning organizational scaling task, we transitioned from a fixed, commodity-based currency system that attempted to peg public initiative to a static value metric [producing recurring, disastrous constraints on public agility], to a fiat currency system, trading co-constrained policy/currency-value for floating currency value and unlimited agility in public policy;

4) that necessary evolution marked an inflection point in the evolving purpose of currency in aggregates of different size, complexity & agility;  
   a) in small, static aggregates, currency can be synonymous with any fairly stable supply of a commodity reference value, and hence a stable method of savings;
   b) in large, agile aggregates, currency must be linked or "backed by" public initiative itself;  with that change, currency becomes primarily an automatically-floating-value unit of account, and it's use as a stable store of value becomes negligible;

Ergo, citizens of a large, advanced, growing economy should "save" only a healthy mix of personal and aggregate options, never significant amounts of fiat currency.   They should concentrate on agile use fiat currency ONLY to denominate increasingly complex & coordinated transaction chains - while exploring their unlimited, aggregate options.  In today's economy, fiat currency is essentially an automatic stabilized supply, produced upon demand to denominate any & all transactions a clever population can design and safely manage.  [We'll talk later about banks as licensed credit rating offices, NOT places to store fiat currency - see Mosler Economics for an in depth review of that topic.]

Methinks that urging poor people in a modern economy to hoard fiat currency is horrifyingly unethical.  That equates to urging them to hoard ONLY those assets guaranteed by design to depreciate.  It's also rather like teaching students how to individually chop down trees with an axe, instead of learning to type, parse & communicate what little matters in real-time, and PRACTICE staging, linking & sequencing increasing complex transaction chains.  Rather than individual effort & individual hoarding, we should pay more attention to reaping the incredible return-on-coordination that is available but grossly under-leveraged.   Put down that axe & fiat savings book, son, talk to these systems folks.  We're gonna make your community survive.  People over 2000 years ago could organize to do things we still can't imagine them being able to do, like Stone Henge & the Pyramids - not to mention complex tribal methods & strategies.  Yet our "sophisticated" electorate today can't do things we can already imagine, because we imagine we're not "saving" fiat currency, and are thereby running out of it?  Preposterous!

One has to wonder if Japan, Nissan, Sheldon Garon, Princeton University or the St. Louis Fed have ventured out into the real world at any time since 1933.  Hint to all, "it's changed."

It really does seem to be true that it's easier to understand the constantly evolving operations & pace of real economies without any exposure to orthodox economics.   Instead of Star Wars missile shields, the most strategic move militaries and nations could make is to build Bozone Shields around those remaining university economics departments still teaching un-evolved, orthodox macroeconomics - or it's history, out of context.


Matt Franko said...

Classic here Roger:

"People over 2000 years ago could organize to do things we still can't imagine them being able to do, like Stone Henge & the Pyramids - not to mention complex tribal methods & strategies. Yet our "sophisticated" electorate today can't do things we can already imagine, because we imagine we're not "saving" fiat currency, and are thereby running out of it? Preposterous!"


John Zelnicker said...

"It really does seem to be true that it's easier to understand the constantly evolving operations & pace of real economies without any exposure to orthodox economics."

And in light of a study I read about recently that 85% of economics PhD candidates felt they needed to know a lot of math, but only 13% felt they needed to know much about the economy itself, your Bozone Shield idea seems quite appropriate.

Tom Hickey said...

What don't people like this get about saving being demand leakage, destruction really. That's Japan's problem. Too much saving and not enough spending. They've been fighting deflation for decades. Maybe Japan should try not making saving so convenient in order to increase spending.

Japan is running an export economy, which means its workers are working for the ROW instead of fellow countrymen and they are shipping their real resources abroad so they can save more (increase digits on spreadsheets).

Matt Franko said...

And right here are the digits right on the spreadsheet:



Anonymous said...

I lack some context here. Are postal savings banks really just institutions for the hoarding of currency - just big fiat currency vaults? My understanding was that in Japan the postal savings banks function more-or-less like commercial banks, lending funds for various projects as well as taking deposits.

Roger Erickson said...

The details of how Japan's postal savings banks work there doesn't really matter. What does matter is Americans urging us to promote a specific use of a similar strategy here, targeted at helping more poor people "save" fiat currency.

Ken said...

My question to all who advocate permanent zirp interest policy is what option should be available for small savers?

Assuming that inflation is contained at two or three percent, that's still enough to eat into savings over time.

Should ordinary people have an option to at least keep up with this, without having to take risks in stock markets?

Anonymous said...

OK, got it Roger. yes, its ridiculous to complain that poor people don't save enough when we have followed four decades of neoliberal policies aimed at driving their incomes down.

Roger Erickson said...


> what option should be available for small savers?

The point is that it's pointless to save in a floating-value (i.e., depreciating) fiat currency as long as the issuing economy is growing. If the economy is growing, then there are always better options than saving fiat currency.

Best approach for low-income citizens is to explore coordination-options, ala the typical college student. More time than currency, so invest the time with great care.

Ken said...

What is better than saving in fiat currency, and what is a "coordination-option"?

Roger Erickson said...

Ken said:

> What is better than saving in fiat currency, and what is a "coordination-option"?

Any appreciating asset? Friendship, trust & recognition for instance. Ever seen the Godfather movies? Read about the American Revolution?

In this case, a coordination option is when a human brain puts 2+2 together, and turns isolated tactics into a strategy of compounding value.

Ken said...

There's no such thing as an asset that is guaranteed to appreciate.

So what you're saying is there should also be no such thing as risk free, non-depreciating savings option, even for small savers.

Not necessarily agreeing or disagreeing ... just want to make sure I understand. It could be a tough sell though, if we ever hope to socialize MMT ideas to a wider public.

Tom Hickey said...

I used to trade for my own account. It started as a sideline, so to speak, and then as many traders have found, it starts consuming a lot of time, both in keeping up with events, studying, and developing strategy. At that point, I had to ask whether this was the best use of my time and what I really wanted to do. 

I decided that the qualitative return was much greater elsewhere, even if the quantitative was not. Looking back, I am satisfied that I got my time and energy's worth, if not my money's worth.

To clarify that, I differentiate trading (speculating) from portfolio management ( financial investment). Trading is about increasing income; it's a job. Portfolio management is about preserving and increasing net worth. While they are essentially very different, they are often confused. Generally speaking, one should only trade a portion of one's net worth that one can afford to lose. That's a distinction that can become blurred. I was not always clear on it, especially when things were going well.

Anyone can manage their own portfolio part-time, likely at least as well as most professionals, unless one is fortunate enough to find someone that is genuinely qualified and delivers on a regular basis instead of just collecting fees.

But to be a successful trader requires a different level of commitment of time and energy. One has to decide if that commitment to success is worth what it takes. After a while, I reconsidered and switched focus.

Ken said...

Right, but I'm still left with the question of whether people should have a reasonable expectation of being able to save in the national currency without exposing themselves to market risk.

By that I mean earn at least enough risk free interest to stay even with a continuous low level of inflation.

I take it the MMT answer is "no".

Tom Hickey said...

If the level of inflation is low and stable, then interest rates are also low, and saving is a real bummer.