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tax rates so now the concept has evolved into raising tax rates to make the economy grow the cause and effect relation is in full bloom but it is wrong just so wrong and again it is based on the flawed premise that balancing the federal budget will fix the economy having said that i will completely contradict myself and tell you how high taxes could be good for economic growth but first you have to give me control of your taxes i will control the horizontal i will control the vertical i can roll the image make it flutter i can change the focus suppose i gave you the choice that you can keep the tax system you have now or instead i will tax you only on the money you save and not on any money that you spend so that if you don t save any money at all your taxes are zero and if you only save a dollar your tax cannot be more than a dollar i don t know which tax you would choose but i think a lot of people would go for option b only tax me on what i save well that s what the corporate tax is like why to stimulate growth to get them to spend and spend more now if i make the tax rate really really low you and corporations too might choose to save a few dollars even though you have to pay a few cents tax on that saving but if i make the tax rate really really high pretty sure you will spend every last dollar just to avoid the taxes so if wealthy people have their money tied up in corporations and if you want them to spend it then you should raise the tax rate really really high evidence you say you want evidence not saying i buy the causal relation myself but i ll give you evidence bruce bartlett is a hair on the tail that wagged the dog and gave us supply side economics bartlett writes unfortunately there s no evidence that the 2003 tax cut did anything to stimulate corporate investment indeed according to the federal reserve nonfinancial corporations have increased their holdings of liquid assets to 1 8 trillion from 1 2 trillion since 2003 thus it s implausible that a further reduction in the corporate rate as pawlenty and other republicans favor would do much to raise investment since 2003 when taxes were cut on the money they don t spend nonfinancial corporate savings increased by 50 percent how much did your savings increase for what it s worth posted by the arthurian at 4 00 am 1 comments wednesday june 22 2011 long and thoughtful recommended reading america s debt the role of the state and the fight for survival by sackerson at broad oak blog posted by the arthurian at 8 00 am 0 comments from michael hudson at gang8 the full post is here i want to quote the first paragraph and highlight just the parts that i worked out for myself independently and agree with absolutely financial crashes were well understood for a hundred years after they became a normal financial phenomenon in the mid 19th century much like the buildup of plaque deposits in human veins and arteries an accumulation of debt gained momentum exponentially until the economy crashed wiping out bad debts along with savings on the other side of the balance sheet physical property remained intact although much was transferred from debtors to creditors but clearing away the debt overhead from the economy s circulatory system freed it to resume its upswing that was the positive role of crashes they minimized the cost of debt service bringing prices and income back in line with actual real costs of production debt claims were replaced by equity ownership housing prices were lower and more affordable being brought back in line with their actual rental value goods and services no longer had to incorporate the debt charges that the financial upswing had built into the system not too shabby all of the meat is highlighted none of the human veins and histories other important bits of the hudson post the united states emerged from world war ii relatively debt free downturns occurred crashes wiped out debts and savings but each recovery since 1945 has taken place with a higher debt overhead debt accumulation is the problem higher debt overhead is hudson s phrase debt accumulation is my phrase for the same thing you can see it in my d p d graphs regarding the post 2008 crash hudson writes most unique is the crash s aftermath this time around the bad debts have not been wiped off the books there have indeed been the usual bankruptcies but the bad lenders and speculators are being saved from loss by the government intervening to issue treasury bonds to pay them off out of future tax revenues or new money creation the obama administration s wall street managers have kept the debt overhead in place i think it had to be done we have just so much debt you couldn t let the bankruptcies happen they would have been like a chain reaction where each one sets off three more blink twice and the whole financial edifice is in ruins to be sure i don t care about the financial edifice but its collapse would have brought down everything else with it and that had to be prevented so to save the stuff i wanted them to save they had to save the stuff they did save this is the stuff dark ages are made of they have kept the debt overhead in place that is the reason the economy cannot recover it is the reason i keep offering these oddball notions like print money and use it to pay off debt i don t know which methods are practical and which are not but there can be no doubt that debt reduction is the one thing that must be done nah don t read hudson s post soon after the last excerpts above hudson gets all agenda driven and boring related post whaddya mean it s not economics a policy of prevention of small forest fires led to less frequent more severe large fires posted by the arthurian at 4 00 am 4 comments tuesday june 21 2011 point of information double checking fred s reserves list for this morning s post i noticed that there are two items listed as board of governors total reserves one of then adjusted for changes in reserve requirements the other not adjusted what s the difference posted by the arthurian at 12 00 pm 4 comments oh my fred lists several number series for reserves i wanted to look at total debt relative to total reserves for yesterday s 4 o clock post i ended up using required reserves which i think was more relevant for that post but i also looked at the board of governors total reserves not adjusted for changes in reserve requirements i looked at total credit market debt owed relative to that the thing increases relentlessly for more than half a century then it drops almost overnight and it ends up in 2010 right back where it was 50 years before one has to wonder if policy is based on anything more than trying to make the current numbers match some numbers from long ago come to think of it i have exactly that objective for the debt per dollar graph see also fygfd repetition posted by the arthurian at 4 00 am 0 comments monday june 20 2011 clinton thumbs down i hesitate to put thumbs down in the title tell you why after the quote from page 4 of it s still the economy stupid by bill clinton under the heading 12 cut corporate taxes i d be perfectly fine with lowering the corporate tax rates simplifying the tax code and saving some money on accountants but broadening the tax base so that all of them pay a reasonable amount of tax on their profits lower the rates to be competitive but reduce the loopholes that cause unfair disparities we all need to contribute something to help meet our shared challenges and responsibilities including solving the debt problem including solving the debt problem first of all the heading is deceiving clinton wants to increase corporate taxes not cut them now i don t have a problem with that but i do have a problem with hiding one s intent under a false heading second let s assume that raising corporate taxes will solve the problems that have arisen since we went over to the supply side that doesn t mean it will solve the problems that arose in the 1970s that drove us to the supply side thumbs down posted by the arthurian at 6 55 pm 7 comments clinton clarity from page 4 of it s still the economy stupid by bill clinton the real thing that has killed us in the last 10 years is that too much of our dealmaking creativity has been devoted to expanding the financial sector in ways that don t create new businesses and more jobs and to persuading people to take on excessive debt loads to make up for the fact that their incomes are stagnant posted by the arthurian at 6 53 pm 1 comments the ratio of debt to money 13 june 2011 next blog brings me to jake s econompic where the second post federal debt per employee links to steve keen s epic piece that changed my understanding of the economic collapse jake says i m reviewing the epic piece this month s debtwatch keen writes is dedicated to analysing how these cavaliers actually make money and debt something they think they understand but in reality they don t i don t know how he gets from that to the myth of the money multiplier but he does let me quote a chunk of it just because it is so irritating the conventional model the money multiplier every macroeconomics textbook has an explanation of how credit money is created by the system of fractional banking that goes something like this banks are required to retain a certain percentage of any deposit as a reserve known as the reserve requirement for simplicity let s say this fraction is 10 when customer sue deposits say 100 newly printed government 10 notes at her bank it is then obliged to hang on to ten of them or 100 but it is allowed to lend out the rest the bank then lends 900 to its customer fred who then deposits it in his bank which is now required to hang on to 9 of the bills or 90 and can lend out the rest it then lends 810 to its customer kim kim then deposits this 810 in her bank it keeps 81 of the deposit and lends the remaining 729 to its customer kevin and on this iterative process goes over time a total of 10 000 in money is created consisting of the original 1 000 injection of government money plus 9 000 in credit money as well as 9 000 in total debts keen follows that explanation with a spreadsheet where the sequence of lendings runs for 20 weeks one new loan per week generating a total of more than 8900 from an original deposit of 1000 he then shows that the final total would come to 10000 but he neglects to say that it would take eternity for that to happen here s the picture after the first 20 relendings of that original thousand dollar deposit graph 1 it came out orange the first vertical bar is the original 1000 deposit each subsequent vertical bar is 90 of the previous bar because 10 of the previous deposit is kept in reserve and 90 is lent to another customer and becomes a new deposit of which 10 is kept in reserve and 90 is loaned out this reminds me of a bad joke my chemistry teacher told many years ago i don t understand why there is hunger in the world he said give em a pound of butter and tell em to eat half of what s left every day they ll always have butter my teacher wasn t making a joke really he was explaining the concept of always approaching a number yet never getting there if you have something and you take 10 of it away or 50 of it you always have something left no matter how many times you take a bit away graph 2 after 100 weeks the amount available for lending is three cents after 116 weeks the amount available is so small that at two decimal places it rounds off to zero after 250 weeks however if we run the numbers out that far the amount available for additional lending is still greater than zero these are the fractions of fractions of pennies that gave richard prior the big paycheck in that old superman movie as the new loan amounts approach zero the total amount of money created by this fractional reserve lending process approaches but never reaches a maximum suppose you draw a square on a piece of paper then you draw a line down the middle of it and shade in one half then you draw a line down the middle of the unshaded portion and shade in one half then you draw a line down the middle of the unshaded portion and shade in one half eventually the square will be almost all shaded in but you could keep going forever shading in half of what s left undone and never get done however the total amount of the shaded in area would before long be almost equal to the total area of the square you started with what this means is the approximate total shaded in area is known or can be determined by exactly the same logic the approximate total amount of money created by the fractional reserve process is also a known amount that total depends on the amount that must be kept in reserve and there is a simple way to figure it out the textbooks always use a ten percent reserve requirement ten percent can be written as a decimal as 0 10 okay take one dollar or just the number one and divide it by 0 10 and it tells you the total amount of money that can be created by the fractional reserve process from one dollar deposited if the reserve requirement is 10 10 can be created if the reserve requirement is 20 5 can be created if the reserve requirement is 50 2 can be created if the reserve requirement is zero there is no limit to how much money can be created from one dollar deposited but expect to get an error if you try to work that out with a calculator the billy blog here has an explanation similar to keen s the formula for the determination of the money supply is m m x mb so if a 1 is newly deposited in a bank the money supply will rise be multiplied by 10 if the rrr 0 10 the way this multiplier is alleged to work is explained as follows assuming the bank is required to hold 10 per cent of all deposits as reserves a person deposits say 100 in a bank to make money the bank then loans the remaining 90 to a customer they spend the money and the recipient of the funds deposits it with their bank that bank then lends 0 9 times 90 81 keeping 0 10 in reserve as required and so on until the loans become so small that they dissolve to zero like keen bill mitchell shows a spreadsheet which runs through the first 20 steps of the process mitchell observes in this particular case i have shown only 20 sequences in fact this example would resolve at around 94 iterations as you can see on the graphs where the succesive loans then fractional deposits get smaller and smaller and eventually become zero keen says the money multiplier is completely inadequate as an explanation wordy bill says the money multiplier is not even a slightly accurate depiction of the way banks operate in a modern monetary economy characterised by a fiat currency and a flexible exchange rate i say so why then do these guys spend so much time going step by step by step by step through the process look it s simple clear your calculator hit the number 1 hit the divided by key type in the reserve requirement and hit the equal key that s it that s how much money can be created from a ...
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