RoR: Forum

Just some quick notes:
1. I would suggest using the monetary base (MB), not M3. M3/MB is a measure of the reserve ratio of banks, it indicates how unstable the banking system is, but I wouldn't consider M3 nor its increases as a measure of socialism.
2. The Fed Gov's CPI methodology is now extremely manipulated. They change both the basket of goods (how much of each product/service is put in the basket) and they swap out quality products for inferior ones (like a grass fed steak for corn fed hamburger). Peter Schiff says his guys calculate CPI at 8-10 percent using older CPI methods.

Manipulating the CPI lower does all sorts of things for the Gov: They can trick people into buying Treasuries at lower interest rates; They don't have to increase Social Security payments as much; They can inflate the Monetary Base more while claiming "CPI inflation" is still low. The only bad thing for them is that it bankrupts the US Postal Service, who's prices are restricted by CPI inflation.

Post 1

Saturday, October 19, 2013 - 9:36pm

Thanks for the tips, Dean.

And that's a good new picture of you, too.

Ed

Post 2

Saturday, October 19, 2013 - 9:41pm

Yeah, good picture!

Saturday, October 19, 2013 - 10:16pm

Dean,

When I said M3, I meant M1 + M2 + M3. Is that -- the sum of those 3 things -- the Monetary Base of which you speak? Also, I included the Producer Price Index as a measure of inflation precisely because of the criticisms you mention. It is much harder to hide and obscure changes in producer's prices. For instance, instead of there being a basket of interchangeable goods (which can be utilized in order to mask rising prices on the preferred goods), producers are often stuck buying exactly the same thing only -- be it steel or crude oil or cotton or whatever.

Does that get me out from under the scourge of your 2 criticisms, or is more adjustment needed?

Ed

Post 4

Sunday, October 20, 2013 - 4:26am

Ed,

When I said M3, I meant M1 + M2 + M3. Is that -- the sum of those 3 things -- the Monetary Base of which you speak?

Summing them is double counting. M2 includes M1; M3 includes M2 (link). The Monetary Base is also defined at the link.

For "B" you wrote "plus the debt held by the public." Did you mean U.S. federal debt held by the public? What about debt issued by state or smaller government entities? What about U.S. federal debt held by sovereigns (especially the governments of China and Japan; link)?

Post 5

Sunday, October 20, 2013 - 9:47am

Ed let me give you a better definition of M0, MB, M1, ... than that link for our purposes:

MB: The total amount of US dollars that the Federal Reserve has ever printed. This number would correspond with gold, as in the total weight of gold that has been mined and purified to > 75% purity in the history of the earth. This number is the rarity or count of the number of a thing in the market.

M0: MB, except Keynessians subtracted US dollars deposited at the Federal reserve that are owned by banks.

M1: The amount of USD that could virtually be immediately demanded by citizens: coins, notes, and demand deposits (err should be available if the banks don't go bankrupt). Banks can tell their depositors that they can immediately demand many more dollars than actually exist in their vaults. So this number is more like the amount of USD that citizens could immediately demand to have, the amount that the Federal Reserve might need to print in order to bail out banks and keep the depositors happy. Note this amount does not include the number of dollars that banks have in their vaults.

M2: M1 plus the amount of USD that banks eventually owe citizens from savings accounts and small CDs.

M3: M2 plus amounts eventually due from big CDs and collateralized loans called Repos.

M4: M3 plus amounts eventually due from treasuries and private bonds.

===============

So... MB is actually the measure of money supply. All those other numbers are just silly amounts that measure how much money will eventually need to be shifted around from one hand to another in the future in order to not default.

Lets say Joe is the RoR Reserve. He prints RoRR Notes (RBucks), 10 of them, and each note has printed on it the number "10". He gives them all to me.

MB is 100 RBucks. Its going to stay this way until Joe gives more RBucks to someone else.

I make a demand deposit bank (my kichen cabinet) and deposit them in there for own account.

M1 is 100 RBucks. (100 RBucks demandable by Dean. The 100 RBucks in the cabinet don't count).

Then I loan them all out to Ed. Ed now has to give them back to me in 1 year.

M1 is now 200 RBucks. (100 RBucks in Ed's hand + 100 RBucks allocated to Dean's demand deposit account (DDA).)

Ed decides he wants to open a DDA with me. He deposits the 100 RBucks in his DDA.

M1 is still 200 RBucks. (100 RBucks allocated to Dean's DDA and 100 RBucks allocated to Ed's DDA. The 100 RBucks in the cabinet don't count.)

The bank decides to loan 100 RBucks to Merlin.

M1 becomes 300 RBucks. (100 Dean's DDA, 100 Ed's DDA, 100 Merlin's pocket.

Merlin opens a DDA with my bank. He deposits 100 RBucks.

M1 still 300. (100 Dean's, Ed's, and Merlin's DDA each. The 100 RBucks in the cabinet don't count towards M1.)

Ed makes gets another loan for 100 RBucks. This time he keeps it in his pocket.

M1 becomes 400. (100 in Dean's, Ed's, and Merlin's DDA each plus the 100 in Ed's pocket)

Next Merlin comes to the bank and demands his 100 RBucks from his DDA. I look in the cabinet, see no RBucks, and then turn back to Merlin and say "Hey, well have you ever thought of owning a Savings Account (SA)? With a savings account you can earn interest! (mumble: but you can't just make demands that I immediately I give you the RBucks in the account)." Merlin falls for it, and lets me transfer his 100 RBuck DDA balance to a SA.

M1 drops to 300. (100 in Dean's & Ed's DDA, 100 in Ed's pocket). M2 includes Merlin's SA, and M2 stays at 400.

====

End of that example... So the addition of what M3 counts beyond M2 is just like the addition of what M2 counts beyond M1. And similar for M4.

M1 to M4 just measure how much money has to be exchanged from one hand to another in order for banks to not default.

A bank defaulting is a crime, a breach of contract. If this were a capitalist world, then the owners of the bank would be required to use their own money to repay the bank's debts, or slave until they do repay, or die if they refuse repay and slave. But loaning out money is not a crime, as its not part of the contractual agreement between DDA holder and bank that the money is to be fully allocated in the vault.

M1 through M4 are kind of redicilous numbers. Let's say that Ed just repeatedly borrowed 100 RBucks from Dean's bank and then put the 100 in his DDA account like 10 times. That would increase M1 by like 1000. In practice they are kind of a measure of how unstable the monetary system is... a house of cards, the bigger M4/MB the taller the house of cards is stacked.

Since for example back when Merlin moved his RBucks from his DDA to his SA, the M1 value went down while M2 stayed the same... M1-M4 don't realy measure the quantity of money that exists, they just measure the quantity of financial risk within a certian distance into the future to indebtedness that can be demanded to be repaid within that time distance.

It would probably be more clear/meaningful if the banksters didn't include circulating coins & notes in thier M1 - M4 numbers. And didn't include M1 within M2, and M2 within M3 etc. You just need to subtract one from the other to get an idea of how much is owed by banks in various forms of loans. But the banksters today are corrupt, and they like to make their numbers confusing and meaningless to be able to hide their doings and manipulate their customers. For example, using M1 through M4 to measure inflation is just plain foolish, MB is the rarity of dollars, and M1 through M4 just measure the willingness of the customers to accept other things such as a DDA balance accounting number printed on a peice of paper instead of having in pocket the "real" USD that is limited in supply and printed by the government enforced monopoly that is The Federal Reserve.

Post 6

Sunday, October 20, 2013 - 10:31am

Ed,

I really like what you've done with your TRIBS index - I think its a great idea! (It inspired me to write a distantly related article that I've since submitted)

Maybe the way to measure Inflation isn't with a money supply number (MB, M1, etc.) but with a price change index. The federal government keeps messing with the CPI, but there has to be a way to get a calculation based upon some stable 'basket of goods' that would reflect the current state of inflation. (Instead of a CPI type of number, it could be a rate of change in the CPI type number over the past decade weighted more heavily on recent years - since it is change where the damage is done to savings and in financial miscalculations)

Because of the psychological economic aspect of demand for money, even a good price change index would be missing something. Right now, there has been far more money pushed out than we see reflected in price changes, because the economic uncertainty has so many businesses and people holding the money tight in hand. With very high central bank reserves, high reserve accounts for corporations, and inhibited purchasing by the consumers, we are suffering an effect of government intervention in the economy, but it doesn't show up in your I index. But I can't think of a metric that captures this economic negative resulting from governments interventions, nor can I think of a way to reflect the damage caused by government taking a monopolistic approach to interest rates (the price of money is being partially controlled by government - price controls on the very commodity used in every transaction!)

Too bad there aren't solidly quantifible metrics for degree of financial uncertainty or a metric for hostility to business/wealth/free-enterprise.

The other thing that come to mind is including the state and local governments in the all of the TRIBS (except for the 'I' of course).

And I'd love to see a summation of the TRIBS factors to get a single number and then graph it to show the changes over time.

Post 7

Sunday, October 20, 2013 - 11:49am

Its really hard to measure net losses due to regulations. Basically regulations force businesses to do things they otherwise wouldn't do, such as:
1. Record and report detailed financial information
2. Collect family and health information from employees
3. Make environments and work processes more safe than desired by the employees (like putting a hand rail on the stairs leading to the roof, requiring all employees to keep a hand on a handrail whenever using stairs (preventing other uses for a hand while using stairs))
4. Tort/responsibility swap regulations & their expensive lawsuits
5. Require the use of USD by raiding the vaults of anyone who tries to make a gold/silver backed currency... requires people to use government privileged banks to help transfer money
6. Require extensive documentation for reasoning to end an employer-employee relationship, causing companies to spend more resources firing and more resources paying an employee that is either not producing more than wage or actually damaging the company's productivity/savings.

For example, jus one regulation like "All employees who do anything must have another employee looking over their shoulder doing nothing other than making sure the pair are safe." would have a huge cost, but is just one little regulation.

The only way I can think of measuring a regulation's effect is to only apply the regulation to half of a set of similar businesses and then ask them to report their profits after the regulation is fully implemented. (An experiment) But then that doesn't even measure all of the losses. If two companies make 1 million nuts & bolts a year each, and you put regulations on one of them which reduces their marginal efficiency so that the regulated business can only now produce 500 thousand nuts and bolts a year and stay price competitive with the competition... Then now the price of nuts and bolts has gone up since now the supply is only 1.5 million per year, and who knows what would have been made if not for the loss of those 500 thousand nuts & bolts which have been regulated out of existence.

Post 8

Sunday, October 20, 2013 - 12:09pm

Index of Economic Freedom by The Heritage Foundation

Disclaimer: I haven't looked at it in a year and they could have been taken over by socialists/keynesians/postmodernists/progessives since I last looked.

By the way, Shadow Stats stopped showing the graph of the US Dollar Monetary Base. That's a little disturbing to me, because supposedly shadowstats is supposed to be here to help us capitalists. Leaving out the MB and only showing M1, M2, and M3 is rediculous. I think on his website you can find older calculation methods of CPI.

Here's a link to see the USD MB history: Fred MB weekly not seasonally adjusted. Current image:

Cheers,
Dean

Post 9

Sunday, October 20, 2013 - 12:09pm

Its really hard to measure net losses due to regulations.

That's true, but I think the main idea is to get an index that allows a comparison from one year to the next, or to see the rate of change in the index (regulations are increasing at x% per year).

With some kind of adjustment factor that is unique to different governments (e.g., how many pages of US regulations = 1 page of Japanese regulations) the index could be applied across countries.

Another difficulty is that large corporations can absorb and handle regulations easier than smaller companies, and that some regulations cause problems due to the ambiguities or lack of clarity in the writing.

With our Tort system, we could take the costs (legal fees for both sides, the total awards, and the court costs) of of x% of all lawsuits and treat it like a regulation cost.

Post 10

Sunday, October 20, 2013 - 4:27pm

Merlin, thanks for clearing that up. And when I said "public debt" I meant all debt that is not intra-governmental (which includes foreign sovereigns holding US treasuries, etc.).

Dean, I really like your example with the kitchen cabinet.

Steve, that's cool that you wrote a related piece, and I'm excited to see the article.

Ed

Post 11

Sunday, October 20, 2013 - 5:36pm

As I stated at the outset, you can get a good glimpse of statism levels from examining just 2 numbers: regulations and spending.

We're getting new regulations at a rate of one new regulation every 3 hours and 17 minutes, 24 hours a day, 7 days a week (~327 pages per weekday, over 3000 regulations per year). Regulations are each about 30 pages long. Contrast that with the first Federal Register, which contained less than 3000 pages (probably less than 100 total regulations all year).

That's less than 100 rules/year back in 1936 up to more than 3000 rules/year now -- a 30-fold increase.

Regarding federal spending, in 1900 it was 3% of GDP and now it is at least 20% of the GDP. Energy spending increased over 2000% since 2002, after adjusting for inflation. Mandatory spending on entitlements was 6.1% of GDP in 1963, and 14.5% of GDP now.

A 30-fold increase in federal regulation (since 1936) -- and a 7-fold increase in federal spending as a proportion of GDP (since 1900). Total government (federal, state, local) spending is around 40% of GDP and growing.

Ed

Sources

Regulation
http://dailycaller.com/2012/09/11/more-than-1600-pages-of-regulations-added-to-federal-register-last-week-cost-now-1-8-trillion-per-year/

http://spectator.org/blog/2010/12/02/federal-register-hits-75000-pa

http://www.fas.org/sgp/crs/misc/R43056.pdf

Spending
http://www.becker-posner-blog.com/2013/09/is-it-realistic-to-think-that-federal-spending-can-be-cut-substantially-in-either-the-short-or-the-l.html

http://www.heritage.org/research/reports/2013/08/federal-spending-by-the-numbers-2013

(Edited by Ed Thompson on 10/20, 7:34pm)

Post 12

Sunday, October 20, 2013 - 6:38pm

When looking at The Index of Economic Freedom over the years, I came to the conclusion that the most important statistic to me was government spending as a percentage of GDP. Lower percentage equals more individualistic citizens.

How is GDP calculated anyways? Is it: (Net worth of citizens at the start of this year) - (Net worth of citizens at the start of last year)?

I'm guessing that isn't how GDP is calculated.

Is it: Net reported income to IRS? Such a number doesn't include income that isn't reported to the IRS, such as black/gray market trades and home-made produce & services. If this is the kind of number GDP is based on, I think GDP could easily be manipulated up and down. Although such a number might be easier to calculate than net worth of all citizens.

Post 13

Sunday, October 20, 2013 - 7:36pm

GDP = private consumption + gross investment + government spending + (exports − imports)

GDP = C + I + G + (E - M)

Black and gray market transactions don't look like they would be included. Nor are lots of service efforts or new houses.

GDP excludes the income from American owned production that is outside of the USA, but it does include production inside the US even if it is owned by foriegners (like a Japanese car manufacturer in Tennessee). (GNP on the other hand measure everything produced that is American owned, even if it is offshore).

I've always hated the GDP because it treats government spending as production!

From Wikipedia:
---------------------

C (consumption) is normally the largest GDP component in the economy, consisting of private (household final consumption expenditure) in the economy. These personal expenditures fall under one of the following categories: durable goods, non-durable goods, and services. Examples include food, rent, jewelry, gasoline, and medical expenses but does not include the purchase of new housing.

I (investment) includes, for instance, business investment in equipment, but does not include exchanges of existing assets. Examples include construction of a new mine, purchase of software, or purchase of machinery and equipment for a factory. Spending by households (not government) on new houses is also included in Investment. In contrast to its colloquial meaning, 'Investment' in GDP does not mean purchases of financial products. Buying financial products is classed as 'saving', as opposed to investment. This avoids double-counting: if one buys shares in a company, and the company uses the money received to buy plant, equipment, etc., the amount will be counted toward GDP when the company spends the money on those things; to also count it when one gives it to the company would be to count two times an amount that only corresponds to one group of products. Buying bonds or stocks is a swapping of deeds, a transfer of claims on future production, not directly an expenditure on products.

G (government spending) is the sum of government expenditures on final goods and services. It includes salaries of public servants, purchase of weapons for the military, and any investment expenditure by a government. It does not include any transfer payments, such as social security or unemployment benefits.

X (exports) represents gross exports. GDP captures the amount a country produces, including goods and services produced for other nations' consumption, therefore exports are added.

M (imports) represents gross imports. Imports are subtracted since imported goods will be included in the terms G, I, or C, and must be deducted to avoid counting foreign supply as domestic.
---------

Also from Wikipedia: Austrian School economist Frank Shostak has argued that GDP is an empty abstraction devoid of any link to the real world, and, therefore, has little or no value in economic analysis. Says Shostak:

The GDP framework cannot tell us whether final goods and services that were produced during a particular period of time are a reflection of real wealth expansion, or a reflection of capital consumption. For instance, if a government embarks on the building of a pyramid, which adds absolutely nothing to the well-being of individuals, the GDP framework will regard this as economic growth. In reality, however, the building of the pyramid will divert real funding from wealth-generating activities, thereby stifling the production of wealth.

So what are we to make out of the periodical pronouncements that the economy, as depicted by real GDP, grew by a particular percentage? All we can say is that this percentage has nothing to do with real economic growth and that it most likely mirrors the pace of monetary pumping. We can thus conclude that the GDP framework is an empty abstraction devoid of any link to the real world.

Post 14

Sunday, October 20, 2013 - 8:03pm

And I'd love to see a summation of the TRIBS factors to get a single number and then graph it to show the changes over time.

[Steve]

Well, Steve, this (below) is all I could muster at the moment. It only includes one aspect: regulation, but it extrapolates trends to provide a telling picture of our future ...

In 1936, the federal government came up with about 100 regulations (from 2620 pages total). That's about 2 regulations each week. In 2012 (for at least one week "in a row"), there were 74 regulations in a week (and about 80,000 pages for the year) -- which is 37 times the earlier rate of regulation. There are 76 years that separate 1936 from 2012, and in those 76 years, the output rate of regulations -- i.e., the "regulationing" -- increased by a factor of 37 (give or take a 20% margin of error).

What that means is that in 76 years from now, there will be 2738 new federal regulations each week (give or take 20%), which will require that approximately 2.5% of the US population (8 million Americans) will have to work for 8 hours a day solely on the formation and implementation of federal regulations.

And 76 years after that, there will be 101,306 new federal regulations each week (give or take 20%), which will require that 92.5% of the US population (288 million Americans) will have to work for 8 hours a day solely on the formation and implementation of federal regulations.

And 76 years after that ... well ... trust me ... you don't want to know what will happen 76 years after that!

:-)

Ed

(Edited by Ed Thompson on 10/20, 8:23pm)

Post 15

Sunday, October 20, 2013 - 8:14pm

Here's another exercise in insanity:

Mandatory spending on entitlements was 6.1% of GDP in 1963, and is 14.5% of GDP today. There are 50 years that separate 1963 from today, and in those 50 years, the proportion of total economic output diverted into entitlements increased by a factor of 2.4. What that means is that, in 50 years from now, mandatory spending on entitlements will be 34.8% of GDP -- and 50 years after that, mandatory spending on entitlements will be 83.5% of GDP.

And 50 years after that ... well ... need I say more?

:-)

Ed

Post 16

Saturday, December 7, 2013 - 2:22pm

Okay, here's the deal

In 1967, the price of a Big Mac was 45 cents ($0.45) and the median household income was $6,140. That's an income that would have bought you a grand total of 13,644 Big Macs. In 2012, the Big Mac price was $4.20 and the income $50,099. In order to buy 13,644 Big Macs, you would have needed to have an income of $57,300. That means that the purchasing power parity of the population (the PPPP, for short) has decreased by 13% since 1967. Folks can buy 13% less stuff today, than they could in 1967. Let's analyze that with socratic dialectics ...

Tweedle-Dee:
What caused this loss of economic power of the citizens?

Tweedle-Dum:
Statism.

Tweedle-Dee:
What is the quickest and easiest way to measure changes in "statism"?

Tweedle-Dum:
As alluded to above, multiply the "total regulations" by the "total government spending."

Tweedle-Dee:
What happens when you do that?

Tweedle-Dum:
You get rising statism from 1900, through to 1967, through to today -- explaining the loss in purchasing power of average, ordinary, hard-working, trustworthy, innocent citizens. The output rate of federal regulation has increased by about 3700% (37 times more federal micro-management) from the 1930s to today and the spending as a proportion of the GDP has increased by about 700% from 1900 to today (7 times the bureaucratic burden to be carried along by now-weary market activity).

Tweedle-Dee:
So what is the solution?

Tweedle-Dum:
Reduce the statism. Limit the rate of US federal regulation to 2 new rules per week (the rate it was back in the 1930s) and then cap the total (federal + state + local) government spending to 7% of GDP** (the burden of US government in 1900) .

Tweedle-Dee:
What will happen if we do that?

Tweedle-Dum:
After some potentially-catastrophic economic adjustments, life will begin to steadily get easier ... until poor folks become middle class ... and middle class folks become really rich son-of-a-guns ... and eventually the rivers will flow with milk and honey.

Tweedle-Dee:
Sounds like a plan. When do we start? Oh, I forgot to ask: Is there anyone with a strong financial incentive to prevent this nationwide financial empowerment -- this lifting up of all citizens -- from happening?

:-)

Ed

**In this solution-oriented scenario, the states get to spend 2.3% of the GDP, the local municipalities get to spend 2.3% of the GDP, and the federal government gets to spend 2.3% of the GDP -- funded by a universal 6.9% "fair" tax on all commerce. An alternative to going "cold turkey" (where economic adjustments are really, really painful), you can implement the action plan at increments of 10% per year for 10 years -- so that by 2024 (10 years from now) we will be down to 2.3% taxation/spending of each level of government. If even this proves to be too painful, utilize increments of 5% per year for 20 years -- so that by 2034 (20 years from now) we will be down to 2.3% taxation/spending of each level of government.

(Edited by Ed Thompson on 12/07, 2:56pm)

Post 17

Saturday, December 7, 2013 - 3:04pm

Afterthought
Herman Cain's catchy motto was "9-9-9!" -- to signify a 9% "corporate" tax, a 9% personal income tax, and a 9% federal sales tax. This would have been added to any state and local taxes already in place -- some people would still pay exorbitant (>30%), inspiration-killing, aggregate tax rates under his plan. My motto is "2.3-2.3-2.3!" which is, admittedly, less catchy but -- I would argue -- is much, much more promoting of human happiness and prosperity.

(Edited by Ed Thompson on 12/07, 3:08pm)

Post 18

Saturday, December 7, 2013 - 3:52pm

Ed,

Excellent Ideas!

I'd suggest that your "purchasing power parity of the population" be measured using the average income left to them after that average family has paid ALL taxes (local, state, and federal). Even that doesn't include the taxes that are hidden in costs of goods and services purchased - somehow those costs need to be factored in because they are just taxes the family paid that were hidden in the prices of goods and services bought.

I'd also suggest something like this: Each new regulation can only be passed AFTER 5 existing regulations are removed. Do that for 10 or 20 years, and then change it to 1 removed for 1 new one implemented (or something like that).

I just saw on a Stossell program that nearly half of the states have laws that do not permit anyone to start certain kinds of businesses (the example on the show was a moving company) without getting the permission from a state recognized trade industry for that state. Honest, I'm not making that up! This guy bought a truck, hired good workers and started advertising and the state of Kentucky jumped all over him for not getting permission - when he filled out the forms, he was denied. They stated that the established moving businesses declared that his application did not prove that a new moving company was needed, and that was what the law required!

Also, I'd pass a law that defines regulations as those things created and passed by legislative bodies and signed into law by the President - there is NO representation when agencies make the regulations. Agencies should only be able to make internal policy, and oversee/administer laws/regulations passed by Congress.

Post 19

Saturday, December 7, 2013 - 7:26pm