Why does the economy have to continue expanding?

[Anonymous]

For the simple reasons that population is growing and the productivity is also growing. Do the math, if GDP does not grow, the hours worked per person must drop. Now if everyone values leisure hours just as much reduced work hours does not have to translate into increasing involutanry unemployment. The reality in the US points the other way though.
By the way, the FRB’s charter is to maintain price stability AND full employment. Whether they can be achieved at the same time is another question.

[bsrsharma]

“inflation is intentionally made”

Nothing like that. Inflation is a collective consequence of everybody desiring to consume more than we produce. When a society as a whole likes to live beyond its means, you get inflation. No body plans on it (except during depressions, when Central Banks do it to stimulate consumption). It is like every credit card user starts to use cash advance from one card to pay off another card.

[bsrsharma]

“inflation is intentionally made”

Nothing like that. Inflation is a collective consequence of everybody desiring to consume more than we produce. When a society as a whole likes to live beyond its means, you get inflation. No body plans on it (except during depressions, when Central Banks do it to stimulate consumption). It is like every credit card user starts to use cash advance from one card to pay off another card.

[bsrsharma]

“inflation is intentionally made”

Nothing like that. Inflation is a collective consequence of everybody desiring to consume more than we produce. When a society as a whole likes to live beyond its means, you get inflation. No body plans on it (except during depressions, when Central Banks do it to stimulate consumption). It is like every credit card user starts to use cash advance from one card to pay off another card.

[My Opinion]

CityDweller, I found this video helpful. You may not agree with the politics of it (which mostly come in at the end), but I thought it did a good job of explaining how money is created and why that requires unending expansion. (I had read about how this work, but it didn’t make complete sense until I saw the video.)

http://video.google.com/videoplay?docid=-9050474362583451279&q=money+as+debt

I got the link from one of the housing blogs, but I can’t remember which one (perhaps it was even from my first love, Piddington’s). Unfortunately, I don’t have time to research it this morning so as to give credit where credit is due.

[My Opinion]

CityDweller, I found this video helpful. You may not agree with the politics of it (which mostly come in at the end), but I thought it did a good job of explaining how money is created and why that requires unending expansion. (I had read about how this work, but it didn’t make complete sense until I saw the video.)

http://video.google.com/videoplay?docid=-9050474362583451279&q=money+as+debt

I got the link from one of the housing blogs, but I can’t remember which one (perhaps it was even from my first love, Piddington’s). Unfortunately, I don’t have time to research it this morning so as to give credit where credit is due.

[My Opinion]

CityDweller, I found this video helpful. You may not agree with the politics of it (which mostly come in at the end), but I thought it did a good job of explaining how money is created and why that requires unending expansion. (I had read about how this work, but it didn’t make complete sense until I saw the video.)

http://video.google.com/videoplay?docid=-9050474362583451279&q=money+as+debt

I got the link from one of the housing blogs, but I can’t remember which one (perhaps it was even from my first love, Piddington’s). Unfortunately, I don’t have time to research it this morning so as to give credit where credit is due.

[garysears]

Ok, maybe not intentional in the sense that there is a conscious war against savers. But the effect seems the same.

“Inflation is a collective consequence of everybody desiring to consume more than we produce. When a society as a whole likes to live beyond its means, you get inflation.”

Your example of the credit card cash advance is interesting. Isn’t consuming more than we produce only possible by ever increasing debt? If the credit card cash advance has a limit, so should inflation. Isn’t inflation simply the result of more newly created dollars running around looking for homes? This doesn’t seem as easy to do without a fiat system. Doesn’t all new money come into existence as debt? My point is an ever increasing amount of dollars has to be in circulation to continue to fund the imbalance. If individual spending recklessness has consequence then why shouldn’t national spending recklessness? Just like the individual, doesn’t our nation eventually either have to walk away on its debt obligations or begin to make some very drastic and painful changes in spending?

“For the simple reasons that population is growing and the productivity is also growing. Do the math, if GDP does not grow, the hours worked per person must drop.”

I’m not overly informed I guess, but this doesn’t make sense to me. Isn’t GDP simply a measure of the total dollars spent and not a measure of the productivity purchased with those dollars? What I am getting at is if you are paying for the same productivity with inflated dollars how can GDP accurately reflect productivity? Also, how can you assume productivity increases just because population does? People have to be gainfully employed actually producing something for productivity to increase. It seems real productivity growth could actually be a small part of GDP growth.

I don’t think a lot of hours worked have anything to do with productivity. I must admit that I don’t really produce anything for society yet I am highly paid. I don’t think a lot of the “workers” in our society do either. Spending all day trying to reshuffle inflated dollars between accounts may employ a lot of people but doesn’t seem to have real intrinsic value. I can see how it would be optimal for there to be neither inflation nor deflation and for the relative purchasing power of a dollar to remain constant. Erring continuously on the side of inflation must certainly have eventual consequence.

Isn’t the main point how much you get for your dollar and not how many dollars are out there? It seems strange for anyone to argue that increasing the supply of dollars consistently faster than real productivity is a good thing. All those new dollars are created at the expense of future productivity (interest). Am I wrong to wonder that interest is charged on money that never existed before? I wish I could create my own money out of thin air and tax future productivity for the service.

How long can we continue to put off eventual repayment of our collective debts? When does the tax on future productivity for all this interest show up? How much longer will creditors issue us new cards to help us shuffle around and increase our debt? It is entertaining to make fun of foolish home debtors, but isn’t that an allegory for our nation as a whole?

[garysears]

Ok, maybe not intentional in the sense that there is a conscious war against savers. But the effect seems the same.

“Inflation is a collective consequence of everybody desiring to consume more than we produce. When a society as a whole likes to live beyond its means, you get inflation.”

Your example of the credit card cash advance is interesting. Isn’t consuming more than we produce only possible by ever increasing debt? If the credit card cash advance has a limit, so should inflation. Isn’t inflation simply the result of more newly created dollars running around looking for homes? This doesn’t seem as easy to do without a fiat system. Doesn’t all new money come into existence as debt? My point is an ever increasing amount of dollars has to be in circulation to continue to fund the imbalance. If individual spending recklessness has consequence then why shouldn’t national spending recklessness? Just like the individual, doesn’t our nation eventually either have to walk away on its debt obligations or begin to make some very drastic and painful changes in spending?

“For the simple reasons that population is growing and the productivity is also growing. Do the math, if GDP does not grow, the hours worked per person must drop.”

I’m not overly informed I guess, but this doesn’t make sense to me. Isn’t GDP simply a measure of the total dollars spent and not a measure of the productivity purchased with those dollars? What I am getting at is if you are paying for the same productivity with inflated dollars how can GDP accurately reflect productivity? Also, how can you assume productivity increases just because population does? People have to be gainfully employed actually producing something for productivity to increase. It seems real productivity growth could actually be a small part of GDP growth.

I don’t think a lot of hours worked have anything to do with productivity. I must admit that I don’t really produce anything for society yet I am highly paid. I don’t think a lot of the “workers” in our society do either. Spending all day trying to reshuffle inflated dollars between accounts may employ a lot of people but doesn’t seem to have real intrinsic value. I can see how it would be optimal for there to be neither inflation nor deflation and for the relative purchasing power of a dollar to remain constant. Erring continuously on the side of inflation must certainly have eventual consequence.

Isn’t the main point how much you get for your dollar and not how many dollars are out there? It seems strange for anyone to argue that increasing the supply of dollars consistently faster than real productivity is a good thing. All those new dollars are created at the expense of future productivity (interest). Am I wrong to wonder that interest is charged on money that never existed before? I wish I could create my own money out of thin air and tax future productivity for the service.

How long can we continue to put off eventual repayment of our collective debts? When does the tax on future productivity for all this interest show up? How much longer will creditors issue us new cards to help us shuffle around and increase our debt? It is entertaining to make fun of foolish home debtors, but isn’t that an allegory for our nation as a whole?

[garysears]

Ok, maybe not intentional in the sense that there is a conscious war against savers. But the effect seems the same.

“Inflation is a collective consequence of everybody desiring to consume more than we produce. When a society as a whole likes to live beyond its means, you get inflation.”

Your example of the credit card cash advance is interesting. Isn’t consuming more than we produce only possible by ever increasing debt? If the credit card cash advance has a limit, so should inflation. Isn’t inflation simply the result of more newly created dollars running around looking for homes? This doesn’t seem as easy to do without a fiat system. Doesn’t all new money come into existence as debt? My point is an ever increasing amount of dollars has to be in circulation to continue to fund the imbalance. If individual spending recklessness has consequence then why shouldn’t national spending recklessness? Just like the individual, doesn’t our nation eventually either have to walk away on its debt obligations or begin to make some very drastic and painful changes in spending?

“For the simple reasons that population is growing and the productivity is also growing. Do the math, if GDP does not grow, the hours worked per person must drop.”

I’m not overly informed I guess, but this doesn’t make sense to me. Isn’t GDP simply a measure of the total dollars spent and not a measure of the productivity purchased with those dollars? What I am getting at is if you are paying for the same productivity with inflated dollars how can GDP accurately reflect productivity? Also, how can you assume productivity increases just because population does? People have to be gainfully employed actually producing something for productivity to increase. It seems real productivity growth could actually be a small part of GDP growth.

I don’t think a lot of hours worked have anything to do with productivity. I must admit that I don’t really produce anything for society yet I am highly paid. I don’t think a lot of the “workers” in our society do either. Spending all day trying to reshuffle inflated dollars between accounts may employ a lot of people but doesn’t seem to have real intrinsic value. I can see how it would be optimal for there to be neither inflation nor deflation and for the relative purchasing power of a dollar to remain constant. Erring continuously on the side of inflation must certainly have eventual consequence.

Isn’t the main point how much you get for your dollar and not how many dollars are out there? It seems strange for anyone to argue that increasing the supply of dollars consistently faster than real productivity is a good thing. All those new dollars are created at the expense of future productivity (interest). Am I wrong to wonder that interest is charged on money that never existed before? I wish I could create my own money out of thin air and tax future productivity for the service.

How long can we continue to put off eventual repayment of our collective debts? When does the tax on future productivity for all this interest show up? How much longer will creditors issue us new cards to help us shuffle around and increase our debt? It is entertaining to make fun of foolish home debtors, but isn’t that an allegory for our nation as a whole?

[garysears]

Ok, maybe not intentional in the sense that there is a conscious war against savers. But the effect seems the same.

“Inflation is a collective consequence of everybody desiring to consume more than we produce. When a society as a whole likes to live beyond its means, you get inflation.”

Your example of the credit card cash advance is interesting. Isn’t consuming more than we produce only possible by ever increasing debt? If the credit card cash advance has a limit, so should inflation. Isn’t inflation simply the result of more newly created dollars running around looking for homes? This doesn’t seem as easy to do without a fiat system. Doesn’t all new money come into existence as debt? My point is an ever increasing amount of dollars has to be in circulation to continue to fund the imbalance. If individual spending recklessness has consequence then why shouldn’t national spending recklessness? Just like the individual, doesn’t our nation eventually either have to walk away on its debt obligations or begin to make some very drastic and painful changes in spending?

“For the simple reasons that population is growing and the productivity is also growing. Do the math, if GDP does not grow, the hours worked per person must drop.”

I’m not overly informed I guess, but this doesn’t make sense to me. Isn’t GDP simply a measure of the total dollars spent and not a measure of the productivity purchased with those dollars? What I am getting at is if you are paying for the same productivity with inflated dollars how can GDP accurately reflect productivity? Also, how can you assume productivity increases just because population does? People have to be gainfully employed actually producing something for productivity to increase. It seems real productivity growth could actually be a small part of GDP growth.

I don’t think a lot of hours worked have anything to do with productivity. I must admit that I don’t really produce anything for society yet I am highly paid. I don’t think a lot of the “workers” in our society do either. Spending all day trying to reshuffle inflated dollars between accounts may employ a lot of people but doesn’t seem to have real intrinsic value. I can see how it would be optimal for there to be neither inflation nor deflation and for the relative purchasing power of a dollar to remain constant. Erring continuously on the side of inflation must certainly have eventual consequence.

Isn’t the main point how much you get for your dollar and not how many dollars are out there? It seems strange for anyone to argue that increasing the supply of dollars consistently faster than real productivity is a good thing. All those new dollars are created at the expense of future productivity (interest). Am I wrong to wonder that interest is charged on money that never existed before? I wish I could create my own money out of thin air and tax future productivity for the service.

How long can we continue to put off eventual repayment of our collective debts? When does the tax on future productivity for all this interest show up? How much longer will creditors issue us new cards to help us shuffle around and increase our debt? It is entertaining to make fun of foolish home debtors, but isn’t that an allegory for our nation as a whole?

[garysears]

Ok, maybe not intentional in the sense that there is a conscious war against savers. But the effect seems the same.

“Inflation is a collective consequence of everybody desiring to consume more than we produce. When a society as a whole likes to live beyond its means, you get inflation.”

Your example of the credit card cash advance is interesting. Isn’t consuming more than we produce only possible by ever increasing debt? If the credit card cash advance has a limit, so should inflation. Isn’t inflation simply the result of more newly created dollars running around looking for homes? This doesn’t seem as easy to do without a fiat system. Doesn’t all new money come into existence as debt? My point is an ever increasing amount of dollars has to be in circulation to continue to fund the imbalance. If individual spending recklessness has consequence then why shouldn’t national spending recklessness? Just like the individual, doesn’t our nation eventually either have to walk away on its debt obligations or begin to make some very drastic and painful changes in spending?

“For the simple reasons that population is growing and the productivity is also growing. Do the math, if GDP does not grow, the hours worked per person must drop.”

I’m not overly informed I guess, but this doesn’t make sense to me. Isn’t GDP simply a measure of the total dollars spent and not a measure of the productivity purchased with those dollars? What I am getting at is if you are paying for the same productivity with inflated dollars how can GDP accurately reflect productivity? Also, how can you assume productivity increases just because population does? People have to be gainfully employed actually producing something for productivity to increase. It seems real productivity growth could actually be a small part of GDP growth.

I don’t think a lot of hours worked have anything to do with productivity. I must admit that I don’t really produce anything for society yet I am highly paid. I don’t think a lot of the “workers” in our society do either. Spending all day trying to reshuffle inflated dollars between accounts may employ a lot of people but doesn’t seem to have real intrinsic value. I can see how it would be optimal for there to be neither inflation nor deflation and for the relative purchasing power of a dollar to remain constant. Erring continuously on the side of inflation must certainly have eventual consequence.

Isn’t the main point how much you get for your dollar and not how many dollars are out there? It seems strange for anyone to argue that increasing the supply of dollars consistently faster than real productivity is a good thing. All those new dollars are created at the expense of future productivity (interest). Am I wrong to wonder that interest is charged on money that never existed before? I wish I could create my own money out of thin air and tax future productivity for the service.

How long can we continue to put off eventual repayment of our collective debts? When does the tax on future productivity for all this interest show up? How much longer will creditors issue us new cards to help us shuffle around and increase our debt? It is entertaining to make fun of foolish home debtors, but isn’t that an allegory for our nation as a whole?

[garysears]

Ok, maybe not intentional in the sense that there is a conscious war against savers. But the effect seems the same.

“Inflation is a collective consequence of everybody desiring to consume more than we produce. When a society as a whole likes to live beyond its means, you get inflation.”

Your example of the credit card cash advance is interesting. Isn’t consuming more than we produce only possible by ever increasing debt? If the credit card cash advance has a limit, so should inflation. Isn’t inflation simply the result of more newly created dollars running around looking for homes? This doesn’t seem as easy to do without a fiat system. Doesn’t all new money come into existence as debt? My point is an ever increasing amount of dollars has to be in circulation to continue to fund the imbalance. If individual spending recklessness has consequence then why shouldn’t national spending recklessness? Just like the individual, doesn’t our nation eventually either have to walk away on its debt obligations or begin to make some very drastic and painful changes in spending?

“For the simple reasons that population is growing and the productivity is also growing. Do the math, if GDP does not grow, the hours worked per person must drop.”

I’m not overly informed I guess, but this doesn’t make sense to me. Isn’t GDP simply a measure of the total dollars spent and not a measure of the productivity purchased with those dollars? What I am getting at is if you are paying for the same productivity with inflated dollars how can GDP accurately reflect productivity? Also, how can you assume productivity increases just because population does? People have to be gainfully employed actually producing something for productivity to increase. It seems real productivity growth could actually be a small part of GDP growth.

I don’t think a lot of hours worked have anything to do with productivity. I must admit that I don’t really produce anything for society yet I am highly paid. I don’t think a lot of the “workers” in our society do either. Spending all day trying to reshuffle inflated dollars between accounts may employ a lot of people but doesn’t seem to have real intrinsic value. I can see how it would be optimal for there to be neither inflation nor deflation and for the relative purchasing power of a dollar to remain constant. Erring continuously on the side of inflation must certainly have eventual consequence.

Isn’t the main point how much you get for your dollar and not how many dollars are out there? It seems strange for anyone to argue that increasing the supply of dollars consistently faster than real productivity is a good thing. All those new dollars are created at the expense of future productivity (interest). Am I wrong to wonder that interest is charged on money that never existed before? I wish I could create my own money out of thin air and tax future productivity for the service.

How long can we continue to put off eventual repayment of our collective debts? When does the tax on future productivity for all this interest show up? How much longer will creditors issue us new cards to help us shuffle around and increase our debt? It is entertaining to make fun of foolish home debtors, but isn’t that an allegory for our nation as a whole?

[davelj]

Holy moly, this thing’s gotten off track. I think some of you folks are over-thinking this issue.

As someone already pointed out above, the REAL economy expands because of population growth and productivity. Over the long term here in the U.S. each has averaged about 1.25-1.50% annually, for real annual growth of 2.5-3.0% per year. That’s the REAL part.

The government tells us that inflation has averaged about 3%/year for some time, although that number is probably more like 4%, or a little more in recent years. The inflation rate, over the long term, is a function of the expansion of the country’s monetary base (for the most part). The monetary base expands as new banks are chartered, the Fed tinkers with interest rates via open market operations (and provides additional liquidity to the system like last week), and tinkers with reserve requirements, among other things. This is how new money is created.

There is nothing inherently wrong with debt or fractional reserve banking. The degree of its inflationary tendencies is all a matter of how the system is managed. And the fact is that while there have been several hundred new banks chartered over the last few years (oh no!! inflation!!), the amount of capital they’ve started with is MINUTE compared with the banks already in operation. Furthermore, most of the deposits that these banks gather come from people switching their accounts over from other banks such that the net effect of new banks throughout the system is negligible from a credit/inflation standpoint. Most of the new banks’ gains come from the pockets of banks already in existence.

In my opinion the inflation from the last several years – particularly in the housing market – has come primarily in the ability of banks to sell mortgages into the secondary markets. This engendered additional demand for mortgages, and thus lower rates (than would otherwise be the case), and eventually looser terms, etc. This, of course, allowed people who could otherwise not get a mortgage to get one, housing prices escalated, and here we are. But that’s now over, for all intents and purposes. We’re in the process of correcting that imbalance.

It’s important to keep in mind, however, that credit/money isn’t necessarily created just because a bank makes a loan. For example, the vast majority of commercial loans aren’t new loans – they’re loans being re-financed and/or moved from one institution to another. And brand new commercial loans are offset by customers who pay off loans and don’t need them anymore; that is, “business births” are offset to some extent by “business deaths.”

Now we’ve had some craziness on the lending side for several years now – not just mortgages, but think of LBOs, etc. – which has caused some inflation (that the government hides from us), but I think those days are over for some time. My guess is that “real” inflation will be somewhat benign for the next 5-10 years unless the Fed screws the pooch in the near-term and tries to bail out Wall Street and marginal SFR borrowers. Then things could get really bizarre.

My point is, don’t overthink the whole fractional reserve issue, non-gold standard issue. Yeah, we’ve got inflation and it’s not going anywhere. It’s certainly worse than what the government tells us, but it’s also not the end of the world. If you don’t get into long-term lending contracts at fixed rates it’s not a big deal.

Personally, I’d rather live in a world of 3%-4% inflation on a regular, expected basis than live in a world where it bounces around negative and positive from year to year. The reason is simple: planning. If I have a reasonable idea of where inflation is headed I (and other businesses) can plan accordingly. If it’s jumping all over the place I and other businesses have a much harder time planning and then maybe we don’t invest as much as a result of the uncertainty, and the economy suffers as a consequence.

The bottom line: We have a fiat currency. Therefore, low to moderate inflation is probably here for our lifetimes and beyond. I don’t fight it. I just plan accordingly. Even though our Central Bankers aren’t perfect (and Greenspan was an out-and-out fraud), over the long term they’ll probably do a moderately o.k. job of managing inflation. So long as you don’t expect any miracles out of them you won’t be disappointed.

[davelj]

Holy moly, this thing’s gotten off track. I think some of you folks are over-thinking this issue.

As someone already pointed out above, the REAL economy expands because of population growth and productivity. Over the long term here in the U.S. each has averaged about 1.25-1.50% annually, for real annual growth of 2.5-3.0% per year. That’s the REAL part.

The government tells us that inflation has averaged about 3%/year for some time, although that number is probably more like 4%, or a little more in recent years. The inflation rate, over the long term, is a function of the expansion of the country’s monetary base (for the most part). The monetary base expands as new banks are chartered, the Fed tinkers with interest rates via open market operations (and provides additional liquidity to the system like last week), and tinkers with reserve requirements, among other things. This is how new money is created.

There is nothing inherently wrong with debt or fractional reserve banking. The degree of its inflationary tendencies is all a matter of how the system is managed. And the fact is that while there have been several hundred new banks chartered over the last few years (oh no!! inflation!!), the amount of capital they’ve started with is MINUTE compared with the banks already in operation. Furthermore, most of the deposits that these banks gather come from people switching their accounts over from other banks such that the net effect of new banks throughout the system is negligible from a credit/inflation standpoint. Most of the new banks’ gains come from the pockets of banks already in existence.

In my opinion the inflation from the last several years – particularly in the housing market – has come primarily in the ability of banks to sell mortgages into the secondary markets. This engendered additional demand for mortgages, and thus lower rates (than would otherwise be the case), and eventually looser terms, etc. This, of course, allowed people who could otherwise not get a mortgage to get one, housing prices escalated, and here we are. But that’s now over, for all intents and purposes. We’re in the process of correcting that imbalance.

It’s important to keep in mind, however, that credit/money isn’t necessarily created just because a bank makes a loan. For example, the vast majority of commercial loans aren’t new loans – they’re loans being re-financed and/or moved from one institution to another. And brand new commercial loans are offset by customers who pay off loans and don’t need them anymore; that is, “business births” are offset to some extent by “business deaths.”

Now we’ve had some craziness on the lending side for several years now – not just mortgages, but think of LBOs, etc. – which has caused some inflation (that the government hides from us), but I think those days are over for some time. My guess is that “real” inflation will be somewhat benign for the next 5-10 years unless the Fed screws the pooch in the near-term and tries to bail out Wall Street and marginal SFR borrowers. Then things could get really bizarre.

My point is, don’t overthink the whole fractional reserve issue, non-gold standard issue. Yeah, we’ve got inflation and it’s not going anywhere. It’s certainly worse than what the government tells us, but it’s also not the end of the world. If you don’t get into long-term lending contracts at fixed rates it’s not a big deal.

Personally, I’d rather live in a world of 3%-4% inflation on a regular, expected basis than live in a world where it bounces around negative and positive from year to year. The reason is simple: planning. If I have a reasonable idea of where inflation is headed I (and other businesses) can plan accordingly. If it’s jumping all over the place I and other businesses have a much harder time planning and then maybe we don’t invest as much as a result of the uncertainty, and the economy suffers as a consequence.

The bottom line: We have a fiat currency. Therefore, low to moderate inflation is probably here for our lifetimes and beyond. I don’t fight it. I just plan accordingly. Even though our Central Bankers aren’t perfect (and Greenspan was an out-and-out fraud), over the long term they’ll probably do a moderately o.k. job of managing inflation. So long as you don’t expect any miracles out of them you won’t be disappointed.

[Author]

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