Mimsy Were the Borogoves

Editorials: Where I rant to the wall about politics. And sometimes the wall rants back.

Paul Krugman’s New Cents

Jerry Stratton, February 11, 2011

The Emperor’s new clothes: Bertall ill Les Habits Neufs du Grand Duc duc.; politics

Ben Bernanke adjusts Paul Krugman’s new suit.

Recently, people on the left, such as Paul Krugman and the Los Angeles Times, have been gleefully pointing out that Texas is going to have a “budget shortfall” just like California and other free-spending states. Their projected future tax revenue is going to fall short of past spending.

Turns out, though, that it’s not the problem it would be in California or at the federal level. Texas does what I recommended a few weeks ago that the US do for social security: they use their income to determine their budget. It’s zero-baseline budgeting: nothing carries over. They start from scratch with each budget, and if they don’t have enough money for something, they don’t buy it.

From Kevin D. Williamson, No, Paul Krugman, Texas Is Not Broke:

Texas’s low-B.S. approach has… left Texas with surpluses that allowed the state to put about $10 billion in its rainy-day fund, which could come in handy now that the economy seems to be clouding up a little. Could, but probably won’t: Republicans plan to introduce a budget that comes in within current revenue without touching the rainy-day fund. Get your head around that: There’s a multibillion-dollar pot of cash sitting there in front of politicians who must be just slavering inside at the thought of it, and they aren’t going to touch it—even though they have a pretty good excuse. Imagine a Congress that could do that."

If California had ten billion lying around, they’d spend it twice, going ten billion in debt this year, and a further twenty billion in debt every year afterward.

I love DJH’s line from the comments:

I love krugman, he makes me feel so much smarter than I am.

What’s amazing here is the mindset: Krugman looked at their revenues, saw that it was going to drop by 20 billion dollars1, and assumed that this meant they would have a deficit of 20 billion dollars (or, probably, more). It doesn’t appear to have occurred to him to look into whether Texas actually does their budgeting in the same ass-backward manner that the federal government or New York does it. The rest of the world is just mini-Krugmanland.

This mindset is one that says, “money doesn’t mean anything”. A government can always print more, tax more, or otherwise make more money, because it controls the presses. The most blatant example is quantitative easing, what we used to call printing money in the days before computer networks made it even easier.

Deficit spending is very close to the same thing: we don’t really ever expect to pay off those loans. We’re going to end up printing more money to cover the payments. And every time we print more money we make what’s already out there worth less. If there are eight trillion dollars in existence, and the Fed prints another two trillion, every existing dollar is worth 80 cents instead.

One equals zero

Take a look at that sentence again. Every existing dollar is worth 80% of a dollar. How can that be possible? That’s the start of a math joke that ends up proving 1 equals zero.

In this case, that joke is right. A dollar isn’t worth anything except what other people pretend it is worth. And that’s the biggest problem with what the Fed is doing when they print more money, and what Congress is doing when they spend money that doesn’t exist. It’s not just that they’re diluting the worth of the dollar. It’s that they’re not doing their part in pretending that money is worth something. They’re acting as if money is worthless. And the longer they act that way, the more likely it is that it becomes true.

Money is worth only what people pretend it is worth. If we pretend it’s worth nothing, then it will in fact be worth nothing.

When we just print more to cover debts, then it’s worth nothing.

If we loan it to people and then just cancel their debts—or continue loaning them more to cover their debt payments, which is the same thing—then it’s worth nothing.

Money isn’t backed by anything substantial. There’s no gold set aside for each dollar in your wallet or savings account. Money is backed only by what the people you want to buy from are willing to pretend it is worth.

That’s why the Coinage Act of 1965 states that United States currency is “legal tender for all debts, public charges, taxes, and dues.” We are legally required to pretend that US currency is worth more than it objectively is when it comes to debts.2

Deficit loaning

Just saw something this morning about the Post Office on MoneyCNN:

The USPS, a self-supporting government agency that receives no tax dollars, said it suffered a loss of $329 million in the first quarter of federal fiscal year 2011. That compared with a loss of $297 million a year earlier.

Actually, they receive quite a few tax dollars—on the order of three billion a year. No one expects them to pay this back: letter traffic isn’t increasing. What’s worse, after borrowing that money from the Treasury, they then give it back to the Treasury where it is counted against the federal debt.3 They and we are treating that loan as if the money means nothing.

Imagine you have a credit card. Your credit card allows you to make your monthly payments by charging them to your card. Would you consider this paying off your debt? Do you think your bank could safely consider your full debt an asset on their balance sheet?4

This is not the only place the government loans itself money and pretends that this means it has more. Social Security is probably the biggest example: the government borrows money from social security, and then pretends that the money’s still there when calculating how long social security will last, and also pretends that the money has offset the national debt.

This kind of pretending that money is just bits that can be copied without affecting anything else is going to make the dollar as worthless as just bits that can be copied. Because the reality is that it’s not pretending: those bits are worthless. We’re pretending when we say that those bits are actually worth something and such pretending is essential to the United States economy. Money is worth something only if we act as if it is worth something.

When we run deficits to pay for debts, we’re acting as if money has no worth. The longer we do that, the more likely it is to become true.

February 25, 2012: Why “we don’t have a plan” is selfishly incompetent

At the congressional budget hearings several days ago, Timothy Geithner was confronted with the Congressional Budget Office’s numbers showing the economy shutting down in 2027. Why, asked Congressman Paul Ryan, does the President’s budget continue the path towards a dead economy? Geithner’s response was:

You are right to say we’re not coming before you today to say ‘we have a definitive solution to that long term problem.’ What we do know is, we don’t like yours.

The White House’s plan—and the Democratic Senate’s—is to ignore the problem, continue spending heavily, and then deal with it when the collapse hits. But that won’t work, because nature does not like that kind of hubris. Deliberately waiting until the last minute invites nature’s wrath. This is not a time-bomb with a visible clock. It’s an invisible, random trigger that, once flipped, will crash the economy. We can’t wait until midnight on December 31, 2026, and start fixing it then.

The analogy people have been using is that once the car drives over the cliff, you can’t turn it around. I’d say it’s more likely hanging from a fraying rope on a circus ride: once the rope snaps, it’s too late to strengthen it. The Democratic plan is to wait until after the rope frays, wait until after the rope snaps, and then start fixing the problem when we’ve dropped to within a few feet of the ground.

We can’t wait until the last minute because that’s after the rope has snapped. But we also don’t even know when the last minute is. If the CBO says 2027, that’s almost certainly the maximum amount of time we have, by the nature of how the CBO is required to work by law.

The CBO is required to perform a relatively static analysis. When the CBO analyzes a bill or proposal, the law requires them to stay within strict boundaries; they can’t use any real-world knowledge other than what is in the restrictions handed them. In one way this is good: if they were permitted wide latitude in their analyses, they would inevitably slide into using that latitude for political means. But in practice this kind of static analysis downplays risks, because risks usually come from unanticipated places. If your proposal anticipates a risk, it also mitigates it.1

Read the full post and comments

November 25, 2011: Money is worth only what we pretend it is worth (Part II: The Revenge of Greece)

I had planned on letting this Telegraph article go other than to save it for future reference. The Europeans have long been forgetting that they need to pretend that the euro is actually worth something, and because of that it’s been inevitable that at some point it will in fact not be worth anything.

Remember, the euro is just like the dollar and most other currencies in that respect: it has no worth other than what we pretend it is worth. We have to act like it’s worth something or it isn’t. When we start acting as if money isn’t worth anything—by creating more dollars as if that’s all that’s necessary to create more wealth—then it quickly becomes not worth anything.

In the case of the euro, they’re pretending that being bankrupt is just some state of mind, and not a mathematical fact. Greece is bankrupt; that’s not a voluntary thing once it’s happened (it is of course a voluntary thing in that how they got there was their choice).

Vox Day wrote a great analogy at Vox Populi:

It’s really astonishing that the European Union has refused to recognize that Greece has gone bankrupt. In trying to save the banks holding sovereign Greek debt, they went and destroyed the value of all the trillions in credit default swaps. It’s like declaring that corpses aren’t really dead, so therefore the insurance companies don’t have to pay out on any life insurance policies. That might save a company or two in the short term, but it destroys them all in the intermediate term for the obvious reason that no one is ever going to waste their money on life insurance again.

It’s like declaring that corpses aren’t really dead! It doesn’t change the state of the corpse. But it does change the trust people have in you. When it comes to currency, trust is the only worth it has.

If we continue to pretend that it doesn’t mean anything, then it won’t mean anything.

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  1. Apparently it went up to 27 billion by the time it reached the LA Times. A real change or left-wing telephone tag?

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  2. The act eliminated silver from dimes and quarters, and basically finished the job of removing hard backing from US currency—something I actually agree with, as I don’t trust gold either.

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  3. I’m not really blaming the Post Office here. This is one of the reasons the Post Office should go private: the federal government, to hide the debt, requires that the Post Office create a federal fund against retiree health costs. This is what the USPS has to borrow to cover. So they borrow it from the Treasury, then give it back to the Treasury, and the federal government pretends it has more money than it did before and that it is paying for retiree health care. They’re double-counting money that doesn’t exist in the first place.

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  4. If you do, you have a fine career ahead of you in politics.

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  1. <- Social Security lies
  2. Initiative required ->