September 26, 2012

Greasing My Spindle Number [increment(previous whatever)]

Hatched by Dafydd

This running series of random thoughts was inspired thirty or forty years ago by John Hinderaker's similarly titled series on Power Line. It's where I put all the news that unfit to print.

Today's installment comprises an argumentative analogy and an illuminating analogy.

First, the snarky one: The Left does not want the people to rule; it wants to rule in the name of the people. For their own good. Because it knows best.

That is, the Left is an abusive husband: No wonder so many women won't leave it, no matter how many times the Left assaults, neglects, belittles, and subjugates them.

We need an intervention! (Or a cop.)

Second, the analogy that makes you go "hm": The admitted point of "quantitative easing" (QE) -- wherein the Federal Reserve "buys" debt by creating fiat money and using it to purchase Treasury bills, thus "monetizing" the debt -- is to trade debt for inflation; that is, the Fed conjures magical money, fairy gold, out of thin air to pay off the nation's debts; play money taints and devalues real money (more dollar bills chasing the same amount of wealth), so the net effect is that money isn't worth as much as it used to be. Thus, inflation.

Let's think about this. Suppose you have a couple of credit cards, a gold card and a diamond card. Your monthly payment is $500 for each card.

In month one, you take a $700 cash advance from the gold card and use that to pay $600 on the diamond, keeping $100 for yourself; that same day, you take a $700 cash advance from the diamond card and use that to pay $600 on the gold, keeping $100.

In month two, you do the same... except you take a little more than $700 from the gold card, because the minimum payment is now slightly higher. (You added $100 to your card last month, taking a $700 cash advance and paying only $600; and the card issuer also added some more to your balance via interest.) Once again, for your cash advance, you take the minimum payment add $200; you keep $100 and pay the rest to the diamond card. On the same day, you do just the same with the other card, taking the minimum payment plus $200 as your cash advance from the diamond card, and paying $100 less than that to the gold, keeping your customary $100 per transaction.

Continue ad infinitum. Since you always pay more than the minimum balance, you never get in trouble. But of course, as these monkeyshines continue, your balance mounts higher and higher.

In real life, you eventually hit your credit limit; the game is then over, and you must come up with a whopping huge payoff.

But it appears I forgot to mention one crucial point: By an amazingly fortuitous twist of fate, you yourself are the official in charge of setting credit limits on both gold and diamond cards.

Therefore, whenever it seems necessary, you raise your own credit limit to keep from hitting the wall. Abra cadabra! Thus you never have to pay your balance, you can keep drawing money out of the kitty in perpetuity, and the card issuer gets more than the minimum payment every month -- everybody's happy!

Well, except for the stockholders in the bank that issued your credit card. Which, in the real world, as opposed to our analogy, are the ordinary schlubs whose incredibly shrinking money is not accompanied by incredibly rising wages; so the actual purchasing power of the ordinary person plummets, dragging quality of life in its wake.

In the endgame, money becomes as worthless as fallen leaves, and we have "hyperinflation," where the inflation rate can rise as high as 3.5 million % per month (as in the Weimar Republic in Germany at its worst, where prices doubled every other day). Everybody's a millionaire while starving to death.

I know I must be missing something somewhere; because if my analogy is accurate, then all these QEs would be nothing but Ponzi schemes that mathematically must eventually collapse (because there is a finite amount of real money on the planet) -- and the Federal Reserve Board would be nothing but a gang of counterfeiters.

And surely such a preposterous conclusion triggers a reductio ad absurdum.



Hatched by Dafydd on this day, September 26, 2012, at the time of 3:54 PM


The following hissed in response by: Captain Ned

No, you're right. QE 1 through 3 have been all about expanding the money supply on the institutional level, not the personal level. Conveniently, the Fed stopped issuing statistics on institutional money supply (better known as M3) somewhere back in '06/'07.

The method of money creation in QE is explicitly not captured in any official Fed measure of money supply. Let that roll around the brain for a bit.

The above hissed in response by: Captain Ned [TypeKey Profile Page] at September 26, 2012 5:08 PM

The following hissed in response by: snochasr

I agree your analogy is essentially correct, but I have two other thoughts, one a fruitful analogy and the other a crazy idea.

The fruitful analogy is that, if ordinary folks find themselves in debt trouble, the first step is to cut up the credit cards, followed by the hard decisions as to what part of your beyond-your-means living to give up. The equivalent here would be that the next time a vote on the debt ceiling comes up, Congress should simply refuse, and then start cutting the budget. Much screaming and hollering, but the debt problem would stop getting worse.

The thought puzzle is this: Suppose, in your analogy, that the card-issuers simply cancelled both cards and the debt attached to them? Since none of the money was real other than the promise to pay, who is harmed? In the federal case, the money is supposedly spent in ways that cannot be recovered and (probably) only temporarily resulted in some high-living bureaucrats rather than any real property, so the only people hurt by this are the people that created the money out of thin air in the first place, and they aren't harmed because they just put the funny money on the books. Their books go back to what they were, the US debt drops accordingly, and the inflation is avoided, yes?

The above hissed in response by: snochasr [TypeKey Profile Page] at September 27, 2012 7:36 AM

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