Synthetic Economics: Money is Crap Anyway

The raison d’être of the Synthetic Economy is to enable both the government and the banks to manage the condition under which the banks had lent trillions of dollars, not only to the Federal government, but states, localities, and even foreign countries, which, as a practical matter, cannot be repaid.

The traditional approach, for a national government, is to ‘monetize the debt’ by printing money to pay it.  Of course, new money, with nothing to back it, will simply lead to price inflation.  Many times in our history, governments and banking systems have collapsed as a result, as the money was quickly recognized as worthless by the public.  In the United States, and modern states with central banks, the process is a little more complicated: the government issues debt, which is bought by the central bank.  The bank creates money on the spot to buy the debt, which the government can then spend.  But the result is the same: money is effectively created out of nothing, with nothing to back it.

The Synthetic Economy addresses this concern by managing what most of us experience as ‘the economy’ (i.e. the Synthetic Economy) so that what most of us experience as ‘money’ maintains a relatively stable value.  This is done by balancing whatever new money is introduced into the Synthetic Economy by money taken out, either through taxes, repayment of ordinary people’s debts, or purchases of imported goods.  (Once a dollar goes to China, the Synthetic Economy will likely never see it again!)  As a consequence, very little of the new money migrates into the Synthetic Economy, so prices remain stable.  In fact, to combat price inflation, the Synthetic Economy is run in a slightly deflationary mode.  This further stabilizes prices, but also depresses wages.

For national governments, big banks, and multinational corporations (the players in the ‘Big People’ non-synthetic economy) this means that money is no longer a scarce good.  Spend all you want: we’ll make more!  But don’t spend it on higher wages for your employees, or new infrastructure or benefits for your citizens.  If too much of this money gets into the Synthetic Economy, it will wreck the balance.

For years, politicians have told us that they can ‘fix the economy’ through government spending.  Alas, it doesn’t work.  One of President Obama’s first efforts was ‘the stimulus:’ a package of some $787 billion in spending meant to get the economy restarted.  It accomplished almost precisely nothing.

Actually, that’s not quite true.  The dislocations of 2008 primarily hit the Big People economy, but did have an effect on the Synthetic Economy as well.  Many ordinary people lost their savings and pensions, or became unemployed.  It was a case where too much money had been bled out of the Synthetic Economy, and we had to put some back to maintain the balance.  However:

  • Much of the stimulus was aid to states and local governments to fund their ongoing operations. This did nothing but spare state and local politicians the necessity of making difficult choices.
  • Some of the stimulus went for infrastructure, but then again, the government is constantly spending on infrastructure (although perhaps not enough to overcome the ongoing decay). So at least some of the infrastructure spending in the stimulus was brought over from programs that would have been enacted in its stead.
  • The stimulus did nothing to help individuals who had lost out in the 2008 dislocations. The banks and other too-big-to-fail firms had previously received bailouts, but individuals were left out.  In fairness, that wasn’t its purpose, and it’s a fair question whether the government should be responsible for making good on individuals’ bad financial decisions.

So the stimulus served to reinforce the status quo, as well as the notion that it’s dangerous for Little People to play in the Big People’s economy.  It didn’t change the economy overall, and did not result in the fount of new jobs that its proponents claimed for it.

In fact, because of the need to maintain balance, we haven’t seen, and are unlikely to see:

  • Meaningful public or private investment in infrastructure. At best, there will be continuing public spending to keep things from falling down, but little more.  On the private-sector side, companies that earn their living through their infrastructure will spend to maintain it, but in the absence of new markets for their products and services, there’s little incentive to build more.
  • Private-sector mobilization to create jobs and do more. For a long time, I have believed that the private sector, rather than the government, has the keys to a real recovery.  The government can’t force businesses to expand or hire people, but if businesses did it for themselves, they could drive a new, real, recovery.  But they won’t, not only because consumers are pretty much spent out, but because introducing new spending into the Synthetic Economy will upset the balance.
  • Significant efforts to redistribute income through taxation. Paul Krugman is a big believer in deficit spending to increase demand, but doing so would be inflationary, and the Synthetic Economy is being run in a deflationary mode for price stability.
  • Meaningful tax cuts… or tax increases. The rates might be tweaked up or down because of political pressure, but the overall regime, and the role of taxation in keeping the Synthetic Economy in balance, will not change.

Years ago, one of my engineering-school professors remarked that ‘money is shit anyway.’  And now it has come true.  It’s certainly true in the Big People economy, where money can be synthesized at will, out of literally nothing.

For now, with the Synthetic Economy, the rest of us have been slow to catch on.

5 thoughts on “Synthetic Economics: Money is Crap Anyway”

  1. I believe that the only thing that “stimulus” can do successfully is to pull future demand in to the present. I thought that the Medicaid expansion was a form of stimulus, and that states would have jumped all over themselves to get it, even though they would have had to pay 10% of the cost. Were I a financial officer of a hospital, I would have been in favor of Medicaid expansion, if only from the point of view that it would give me a revenue stream and I’d be able to cut my losses on treating the uninsured. This may well be an uninformed opinion.

    One thing to consider is the reason for quantitative easing: there weren’t enough buyers for government bonds at a price that the government was willing to pay. It’s a shell game: the Fed refunds the interest paid to the Treasury.

  2. “‘Stimulate the economy,'” my mother used to say. “You mean, give it a back rub?”

    Indeed, any deficit spending could be thought of as primarily pulling demand into the present from the future, rather than creating new demand. But I don’t believe that ‘stimulating’ the economy, nor pulling demand forward, was the real purpose. The stimulus was meant to keep us semi-comfortable and not think about how we might do things differently going forward. For example, New York State received several billion dollars of ‘stimulus’ money. They used it to fill in their budget hole that year, without further thought.

    If I ran a state (as a state is a creature of the Synthetic Economy, in that it provides services to ordinary people and can’t create money), I would have been leery of the Medicaid expansion in Obamacare. The cost of medical care has been continuing to rise, and I wouldn’t want to even be on the hook for 10% of those future increases. For a hospital, Medicaid might be a new revenue stream, but it would bring in more patients, so there’s a tradeoff.

    If the Federal government can’t sell its debt at a reasonable price, it has the option of monetizing the debt, either directly or (as we do now) through the central bank. The more interesting question is why we had rampant price inflation in the 1970s, when the government ran comparatively small deficits, and still had orderly markets for its debt, and we don’t now, even though we have much bigger deficits and quantitative easing. (Yes, part of the answer is that the government has queered the inflation figures. But, given the scale of the debt and the easing, it comes nowhere close to explaining why our current price inflation has been modest.)

  3. Reasons for inflation to be relatively modest:

    1. Wages not increasing, or even keeping up, relative to inflation
    2. Cheapening of goods, to include shrinking package sizes
    3. Consumers are reluctant to take on new debt, reducing demand. Existing debt and the need to pay it off (i.e. student loans and credit card debt) also reduces demand.
    4. Productivity increases are far ahead of wage increases.
    5. Exporting of jobs to reduce costs, which in turn reduces the ability of employees to demand wage increases.
    6. Low interest rate environment worldwide (see negative interest rate on savings in Germany, so-called punishment interest), and 0.6-0.8% interest at credit unions, and 1.58% rate on I-bonds. This, in my opinion, is a failure to price for risk.

    There are lots of other reasons , but these are the ones that come to mind quickly. The economy didn’t get a shot in the arm from declining oil prices because people paid down or avoided more debt with that “extra” money, which isn’t much on a weekly basis.

  4. All of your observations are true. But in the past, the conditions we’re experiencing would be coupled with a tepid, unhappy stock market. Conversely, a soaring stock market used to be associated with prosperity for the rest of us. How did they get uncoupled?

    Moreover, these conditions have persisted for several years: long enough for those pummeled by the initial downturn to pick themselves up, dust themselves off, and get back to business. But it isn’t happening. Why?

    And the low interest rates do not represent a failure to price for risk: in the Big People’s economy, there is no risk, as money can be synthesized out of nothing if needed. But there are other weird things that happen, and they will be the subject of my next post.

    The drop in oil prices wasn’t that great, per capita, to begin with. It meant that people who drive a lot could breathe a little easier, but not much more than that. But we haven’t really begun to experience the bad effects of the downturn, as all the people whose jobs turned on $80-100/barrel oil become unemployed.

    1. I agree that the reduction in oil prices isn’t a lot. For instance, I drive 200 miles per week round trip to work. My car gets about 35 miles per gallon, which is a blended average of highway and local driving. At $4 a gallon, I can expect to pay about $24 a week for gas. At $2.50, the current price in my area, I will pay about $15.

      The problem of shale oil drilling sites shutting down will probably be felt locally first, with the “man camps” unable to fill their beds at the boomtown rate. There is a bumper sticker that a former colleague had on his car back in about 2002 that read something like, “Please, Lord, give me another oil boom. I promise not to piss away the money THIS time.” Even if they were making $50-60 an hour as roughnecks, their cost of living was high, and there are still income taxes to be paid.

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