Tuesday, January 13, 2009

Robert Kuttner as Nigel Tufnel

Talk of $2 trillion in "stimulus" inspires Ace:
This is a Spinal Tap "But this goes to 11" moment. The actual amount of wealth the nation possesses is not some infinitely flexible quantum. Printed money represents a fraction of the wealth of the nation (which the government can seize, basically, to put tangible value behind printed paper money).
You can print up all the new money you like, but this does not actually create more wealth. It merely makes each dollar represent a smaller fraction of that pile of wealth.
So, like the amp which goes to 11, you can make up any denomination you like but you're not actually increasing output.
And once confidence in the currency is damaged enough... well. Ask interwar Germany, ask Zimbabwe. Ask a dozen Latin American countries which turned on the printing presses to "satisfy" their debts.
Nigel Tufnel, liberal economist:

UPDATE: Cooking the books on the deficit (H/T: Instapundit).

UPDATE II: Welcome, Instapundit readers. Y'know, I think maybe Natalie Dylan could teach liberals a thing or two about economics. 


  1. Conservatives who worry about inflation and devaluation of the dollar as a result of "bailouts' are both correct and incorrect.

    Incorrect first because, if a large amount of dollar and dollar instruments around the world have become vapor due to mortgage defaults, CDS wipeouts, pension fund failures and other disasters, then the new dollars just replace old dollars that don't exist anymore. The wrong people may end up richer or poorer, but the dollar won't inflate.

    Later, after the dollar instrument implosions have all been adjusted for, and bailouts are still continuing (because they feel so good) conservatives will be correct in arguing that bailouts are inflationary. By that time it will be very difficult to make anyone listen.

  2. Marty DiBergi: It's very pretty.

    Nigel Tufnel: Yeah, I've been fooling around with it for a few months.

    Marty DiBergi: It's a bit of a departure from what you normally play.

    Nigel Tufnel: It's part of a trilogy, a musical trilogy I'm working on in D minor which is the saddest of all keys, I find. People weep instantly when they hear it, and I don't know why.

    Marty DiBergi: It's very nice.

    Nigel Tufnel: You know, just simple lines intertwining, you know, very much like - I'm really influenced by Mozart and Bach, and it's sort of in between those, really. It's like a Mach piece, really. It's sort of...

    Marty DiBergi: What do you call this?

    Nigel Tufnel: Well, this piece is called "Lick My Economic Stimulus Pump".

  3. Doug...

    You're confused. And what does any of this have to do with conservatism?

    First, take at look at the FRB data for M2, which is the accepted proxy for the dollar supply as a medium of exchange:


    Really started to climb in the late '90s, didn't it? And see the two sharp upticks at the end of the time series in 2006-08? That's the Congress, Treasury, and the FRB buggering us presently.

    Now, on to your cliams:

    If I default on a mortgage the following has occurred:

    I bought the house for $100 (with zero down, say,) which flowed from a bank through my hands to the seller of the house. No change in cash in the economy there.

    The bank set aside a certain amount of capital on its books against the loan. Let's say it took in $110 in deposits, loaned me $100 and put $10 aside as a reserve.

    I promised the bank to repay an NPV of $100 over 30 years. Now I can do one of two things in extremis:

    1. Repay the NPV of $100 to the bank over the remaining mortgage term, even though right now my house is worth much less than $100. This will make me feel poorer and will lead me perhaps to spend less, decreasing the velocity of money (V.)

    2. Default, leave the house, and the bank will sell it for 40 cents on the dollar.

    In case (1), there's no effect on the bank's cash. In case (2) there's no effect, either. The bank will take an accounting loss on the $100 loan it made with no cash flow effect. The bank's future expected value will decrease by $60. The $10 in cash reserve still sits on its balance sheet and in its coffers. $40 will flow from the new buyer to the bank in the foreclosure sale. No change in cash or the money supply in our economy.

    You confuse (a) money effects with (b) actual returns on investments compared with expected returns. This extends to the financial instruments (CDOs, CDOs, etc...) and investment fund examples you mention.

    If I bought a broad market US stock fund a year ago for $100 the people who sold me the basket of stocks in that fund collectively took my $100. And did something with it. When I sell that fund today for, say $60, that cash flows from my pocket to someone else's.

    The fund plummeted in value. My bad luck. No effect on the money supply. On velocity, perhaps; on GDP down the line, maybe. Not on M, however.

    What does affect the money supply directly, however, is the massive printing of dollars we're witnessing right now.

    Repeat after me (with great deference to the dear departed Professor Friedman):

    "Inflation is always and everywhere a monetary phenomenon."

    And increasing the money supply dramatically will ultimately lead to a much higher (and as of now quite unpredictable) price level. With no other effects besides enriching debtors, impoverishing creditors, and rendering investment decisions difficult to make None of that is desirable in the long run.

  4. Does anyone ever slow down long to try and understand how wealth is CREATED?

    Until we understand that concept, how will we know what need to be done to create more of it faster. Which is what we really, really need to happen?

    maybe this will help: