Saturday, June 25, 2011

The Marginal Propensity to Hoard

Dick Cheney said "deficits don't matter", and for his purposes that was true.   Speaking as he was of the budget deficits of the United States, monopoly issuer of a floating fiat currency, he was correct if he meant these deficits could never threaten the solvency of the US government. For Cheney this meant it was OK to spend prodigious sums that would go mostly to management bonuses and salaries at companies contracting to fight America's wars for it, companies with which he was deeply affiliated.  Cheney meant that since the deficit could not make the US insolvent, there was no problem with it making him and his friends rich.  

On a floating fiat currency, so long as the issuer of the currency, in our case the US government, denominates its debts solely in that currency, as ours does, it can never be made insolvent by those debts.  This is a simple fact of fiat currencies, money is created whenever the government spends and extinguished whenever it collects taxes.  While this does not mean that deficits are unimportant, it certainly means they do not threaten the solvency of the government.  Deficits are an outcome of an hysteresis in economics that results from the inextricability of human nature from the object of the discipline.  

Deficits are a gauge of what I'll call the marginal propensity to hoard. They are a measure of that hysteresis, their meaning is what they tell us about the psychology of their civilization, they measure the degree of economic anxiety.  Humans evolved with an innate propensity to save as the things that they acquired were directly linked to their survival.  The perishable nature of most of the stores necessary for subsistence however were a natural barrier to hoarding: store more food than you can consume before it spoils and it converts to waste; rituals of exchange convert this perishability into reciprocal obligation and networked wealth.  Money, because it does not so readily spoil, spoils these relationships.  Once reciprocity is replaced with commerce, and money, by mediating, removes reciprocal bonds from exchange, it becomes perfectly possible to hoard the medium and thus desiccate the float of commercial exchange.

Economists like to pretend that savings always equals investment, but mostly they accomplish this by simply calling savings investment, on the basis that it bears interest.  In the world of fiat money this is an error.  With fiat money, the sale of government debt is a tool to maintain positive interest rates in a system where infinite potential supply of money creates a natural rate of interest at zero.  With convertible monies, say a gold standard or stirling, because the monetary base is finite, its scarcity can drive the interest rate up and when a using government is forced to borrow under duress, its creditors can set the rate where their competitors allow: the rate is controlled by the markets.  With fiat money the rate is set by the government and controlled along the yield curve to the extent that the government chooses.  We have seen compelling illustrations of this in recent Fed efforts at "quantitative easing". 

An actual investment occurs when an actual entrepreneur, rather than a financier, understands some mechanism for the creation of real new wealth and borrows savings money to deploy towards the purchase of capital goods, their organization and their productive use by newly trained and employed workers.  Investment so defined is the uniquely creative act of capitalism.  For the entrepreneur the expenditure of borrowed savings money does not produce a decline in net worth: while the money spent on capital goods is spent back into circulation, the entrepreneur's net worth remains the same as his wealth transforms from money to capital goods.  

The same thing happens with his expenditures toward organization, training and employment; none of these lower his net worth, they simply transform it into whatever good is being produced.  So all of the borrowed money of the investment is spent back into the overall economy but the investor's net worth is preserved in the production of whatever the good.   As he produces, he pays down his debt and accrues income from that efficiency he has added.  The loan produces interest on the original savings money, the loan is spent back into the larger economy as a pure add to that system and the entrepreneur is left with capital goods and employees equal in value to the loan who create new wealth.  So all of the expenditure is a net add to the total profitability of the larger system.  This is real investment, but it only happens when real entrepreneurs, not financiers, can realistically foresee future demand pull for profitable investment.

But with floating fiat currency governments sell bonds that bear interest to manage their interest rates.  The interest they pay is an alternative to investment income when the government is not at the same time using its spending to pull full utilization of the real resources in the economy.  When well targeted government spending draws the economy near full employment of both capital and labor stocks, the interest government bonds pay becomes a real return on investment that well designed government spending is. 

When the government allows real resources to lie idle as is now the case, the interest it pays on bonds does not represent productive use of resources and is better thought of as a rent for those who receive it.   This is income that accrues from idle wealth and is a rent that results solely from the governments maintenance of positive interest rates and when growth in the real economy stalls it creates a perverse incentive to hoard as hoards of adequate dimension kick off comfortable and entirely risk free income.

While neoclassical economics claim the government pays interest on bonds to attract investors, in fact the government pays interest on bonds to support a positive interest rate: the prior expenditure by the government has created deposits with which banks seek yield: surplus reserves that accrue from these deposits and that can not be auctioned off in the overnight market are used by their holders to purchase treasury bonds to preserve what minimum yield is found there.  If surplus reserves could not be stored in bonds, the search for productive use in the overnight markets would drive the interest rate to zero.  (Payment of a supporting rate on surplus reserves is another tool floating fiat central banks use to maintain a positive interest rate.)

When financiers lose confidence in entrepreneurs' ability to make new real wealth in the non-financial economy, because of collapses of demand or breakdowns in trust within the larger system, Treasury Bonds become a way to access the wonders of compound interest without making investments.  This is when savings becomes hoarding in a floating fiat money system.   A certain amount of this is inevitably a result of human nature and the marginal amount is the result of the state of confidence in the larger economy: the lower the confidence the higher the marginal propensity to hoard.

For the United States, as the issuer of the world reserve currency, there is a large built in marginal propensity to hoard.  The neoclassical financial policies pursued since the late 1970s by our proxies at the World Bank and the International Monetary Fund, by forcing deflationary wealth extraction on those of our trading partners that could not fund their debt obligations in dollars when poor underwriting caused confidence to collapse, have created a massive demand for dollar reserves held by the central banks of these partners to hedge against poor underwriting by their creditors. These are essentially hoards we bribe our trading partners to hold by paying interest and bully them to hold by threatening imposed "austerity" when our underwriting fails.  

(update: The entire Euro Zone crisis of the last four years is a result of bad underwriting by creditors, mostly in Germany, who use their influence at the ECB to impose "austerity" in a failing attempt to avoid writing off the bad loans. Every "bailout" one reads about in the Euro Zone is another loan made to insolvent nations to preserve the cash flows on failed loans that should have been written down long ago.)

Some of our more authoritarian trading partners, Germany and China for instance, take advantage of this system to purchase surpluses of Treasury's beyond their balance of payments exposures.  This action bids up the relative purchasing power of the dollar while reducing the relative purchasing power of the Euro and the Yuan respectively.  This causes goods made in Germany and China to be more affordable in the US than they are in Germany and China respectively and drives the US trade deficit with these countries.  But ultimately what Germany and China have done is to deprive their populations of consumption goods in exchange for IOUs from the US that it can always pay off if it chooses with fiat money. This confused mercantilism is a third source of significant marginal propensity to hoard in the dollar denominated economy as the elites of these countries choose to artificially deprive their populations of consumption by artificially drawing production into their economies by artificially suppressing relative purchasing power.  

So our mercantilist trading partners are a big part of the marginal propensity to hoard measured in the accumulated debt of the US government, our honest trading partners fear of runs on their debt is a second addition to the hoard. But the biggest expansion of the marginal propensity to hoard in recent years has been the break down in trust within the US economy itself that has resulted from "financialization".  Convinced that their counter parties are systematically taking advantage of them, convinced that there is no realistic future demand pull for productive investment in the real economy and convinced that the government will enforce poverty on the majority of people of the United States to preserve the relative value of financial assets, what was once an investor class in the United States has become a hoarder class insisting on an economy of rents rather than investments.  

By calling their hoards "investments" they glorify themselves as "entrepreneurs" despite having no idea whatsoever how actual wealth is made.  Secure in their delusions they are confident our trading partners will want them to bring the "benefits" of these delusions to other nations. The rest of the world sees these predatory parasites for what they are, but because they have monopolized the megaphones of commercial media in the United States and Europe they remain the last true believers of their own propaganda and confidant in their ignorance they drive the United States and European Union towards a neoclassical Great Leap Forward where the productive capacity of what was a great civilization will be dismantled on the ideological alter of Mammon dressed in the gown of Prudence.

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