Germany wants to take control of the Greek budget ?!

[Beet]

While this is a very bad idea, one has a great deal of sympathy for the German position. They deprived themselves the most, and are opening their pockets for other countries, and still get attacked.

The problem is not this country, or that country, it's a faulty conception of economics that says austerity and other contractionary measures will lead to growth.

[Beet]

Whose going to take over our budget after more wreckless spending?

No one. We have our own currency, so we will never be in the position of Greece.

[Beet]

Whose going to take over our budget after more wreckless spending?

No one. We have our own currency, so we will never be in the position of Greece.

more relevantly, we have the most potent system of organized violence ever known to man, which means universal annihilation would occur prior to the realization of T_W's fantasy.

Well that too, but I would like to believe the US would not use violence, event to prevent something like a financial crisis.

[Beet]

We observe those pesky Geneva conventions.  No wonder we're losing wars.  

The US observes the Geneva conventions? Since when?

Yes, the only part of an otherwise strongly sophisticated post that struck out as surprising, if only because it was coming from a die hard Paulite. Then again, he is a Paulite who was a diehard neocon in 2003.

[Beet]

diehard neocon in 2003.

/rolls eyes/

I was never a power projectionist.  I find it difficult to take any such accusation seriously, and I will assume for the moment that you're joking.  Or trolling.

My apologies, upon some searching through the archives, you did in fact declare your opposition to the war. I was thinking of this post, and making inferences based on a combination of your conversion to the GOP because it was the nationalist party, being a fan of Bush II, and what were the most salient issues at that time [December 29, 2003 being in particular a couple weeks after Saddam Hussein was captured, arguably the high point of neoconservative feeling in America, after April 2003]. In any case, I suspect that we largely agree in this discussion... as I was saying earlier. While the United States certainly possess the capability to destroy the world with our thousands of nuclear weapons, we may be a better country in that we would not actually do so in response to a threat by foreign investors to stop buying our bonds, which (a case can be made) makes us better than the organizers of the Holocaust and people who gang-rape women with bayonets. So I maintain in the end that our possession of our own currency is the main reason why we will not find ourselves in the same place as Greece.

[Beet]

Out of curiosity mostly, do you consider the trade deficit to be a problem? And if it is, how could it be remedied, unless other currencies rise in value relative to the dollar?

[Beet]

Ben Bernanke has stated that the Fed doesn't control the value of the dollar.  This is, at best, a gross underestimate.  Sure, the value of the dollar depends on several factors, such as fiscal policy and Wall Street trading decisions, but monetary policy is the biggest factor.  Weaker dollars mean rising prices, and that affects you and me adversely. 

Agreed fully.

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How would we change the rate at which Americans save and invest?

[Beet]

How would we change the rate at which Americans save and invest?

Perhaps step one would be to stop massively promoting consumption.

You like repealing the mortgage interest tax deduction?

And stop giving such "easy" credit.

Such as? By raising mortgage rates?

[Beet]

I was thinking more along the lines of how easily and recklessly a lot of people are given credit cards.

Ah, yes. Credit cards have definitely contributed to America's consumption habit. In the past few years, this kind of credit has been on the decline. Many of the worst credit card abuses were curtailed in the CARD Act. The total amount of revolving credit outstanding has also fallen substantially after years of fast growth. Credit card debt was recently overtaken by student loan debt as consumers' largest debt problem. So I think we have made progress on this front since 2007.

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Really? Why do you think that?

In economics, I think textbooks try to simplify concepts for students so that what is being studied can be properly focused on. Usually, the free market ideas are the most beautiful and elegant, and you can't understand the effect of government intervention without first understanding how the market would work without government intervention, so it makes sense to teach it that way. It is true that currency markets, like all other markets, adjust to supply and demand, and normal market forces in a perfectly free market should in theory self-adjust. For better or worse that is not what we have.

I am still not fully decided trade deficit is inherently good or bad for the United States, although I've been thinking about this question for years. It does make me uneasy for foreigners' claims on US assets to increase year after year as we import their capital. Additionally, it means fewer jobs. Many of the so-called investment opportunities for which we import capital, are not really good investment opportunities (the entire US housing bubble, for one). On the other hand I understand that a more valuable dollar increases our purchasing power, and that the effect of this often falls most heavily upon the working class, and that is an important consideration for any Democrat.

[Beet]

angus,

That structure does clarify things a bit. I have not much to say about #3, as I do not have a strong opinion on trade barriers; I think that in general, the assumption of ideality works well in some instances and not so well in others. My understanding is that some of the most highly developed ideal models of the free market have trouble explaining things like involuntarily unemployment. Society is generally too complicated to be explained by mathematics alone. Mathematics are relatively good at describing physical phenomenon, less so biological, still less so psychological and I think, least of all so social phenonena, which are at the very least an aggregate of psychological ones. That does not stop economists from trying, of course.

I will reflect on #4.

We are far apart on #1 and #2. On #1, I think you are missing a number of factors. Firstly, the value of a dollar to every individual is different. To Steve Jobs on October 3, 2011, the value of a dollar was nil. The dollar had nothing that he wanted, as it could not buy him an extension of life (at that point, he may well have traded his one extra day as a billionaire, in exchange for living 20 more years as a hobo). To most of us, the value of a dollar is equal the utility (to simplify) that we expect to get from it, which can be approximated as the inverse of the cost in dollars of the basket of goods that we want to consume, assuming that we are substituting wisely. It is different for every person, and it has more to do with the price level than the quantity of dollars out there, let alone the dollar exchange rate. I do concede that a lower dollar exchange rate can make you worse off; but my point is that you cannot make a 1-to-1 statement from a weak dollar policy to the dollar in your pocket. Many factors, including your own personal situation, your spending preferences, the price level, etc. come into play. Even less can you make the case that a weak dollar policy has a negative effect on your own personal utility, because your utility depends on many factors beyond even the value of the dollars you have, including your investment returns and interest income, your future wages, your employment outlook, more peripherally the condition of your family, friends and community, perhaps the availability of credit to you if you need it, the fiscal condition of your government, and the like.

To #2, I hardly even know how to respond. The first thing we point to is all the financial crises in the rest of the world that are the basis of our case. Whether one looks at Sweden, Argentina, Russia, Southeast Asia, the United Kingdom and France among others during the Great Depression, or indeed what is going on today in Greece and Spain and Germany and the like; It is clear that the main benefit of a weak currency is that it increases demand for labor and other kinds of investment that increase production in tradeable goods (as opposed to non income generating goods such as housing). It is much broader than the owners of Lincoln Continentals or MacIntosh 3G systems companies. With a strong labor market and rapidly rising wages, the public gets more and more flush every year, certainly compared to the opposite.

[Beet]

Good points, angus.

One issue that hasn't been touched on so far is how monetary policy is conducted. Today, generally when the central bank purchases government bonds it does so from a small coterie of large banks and the monetary base is expanded through these banks' deposits at the Fed. The money goes first to the innermost sanctum of the monetary system; from there, it is available to be loaned from the large banks to others; it trickles out. Inside-out, or Trickle-out, monetary policy.

One could imagine, however, the government creating money and simply mailing a $100 check to every household in America. The money would find its way back into the banking system as deposits, and eventually a portion of it would be used to cover banks' required reserves, and find its way back to the Fed. You could describe this as a more Outside-in, or trickle-in, form of easing. Of course, strict rules would have to be in place to prevent such a policy from being abused. For example, only implementing it if there is widespread deleveraging throughout the economy, to maintain the monetarist goal of a fixed growth rate in the money supply.