On currency, again

On currency, again

At the beginning of our poetry class in jail, I walked around the room to give the printed poems to people.  I noticed that somebody was working on an elaborate Valentine’s Day card.  (The date was February 28th.)

“Oh, cool,” I said, “did you draw that?”

“Naw,” he said.  “I commissioned it and all, though.  Designed it.  Cost me two Honey Buns.  Check it out.”

He waved me in to see the card up close.  The front had a red rose with marijuana leaves sprouting from its stem.  The poem he’d written inside began:

Roses are red,

Violets are blue,

If you were a blunt

I’d smoke you too …  

“Cost me two Honey Buns each time,” he said.  “They shredded my first.  I mailed it out, but they said I addressed it wrong, said I wasn’t, what’s that thing, no money on your books … ?”

“Indigent mail,” somebody told him.

“Yeah, said I wasn’t indigent, so they shredded it.  Now I’ve gotta send another one.”

#

Another time, somebody explained the booms and busts of the economy in jail. 

In the world at large, the business cycle typically lasts about five to seven years – the economy will rhythmically surge and then contract.  This is bad news for the unlucky cohorts who begin their careers during the cyclical recessions – these people typically have lower earnings over their entire lifetimes – but because the cycles are so predictable, central banks are supposed mitigate the downswings.

The Forces of the Business Cycle. From _Some problems in current economics_ by Malcolm Churchill Rorty, AW Shaw Company, 1922.

In jail, the business cycle lasts a week.

“We get commissary on Friday, so every Friday, people have coffee again, we all drink too much.  People pay off their debts … or you get an asshole who racked up a bunch of debt then goes to seg on Thursday, tells the guards he’s hearing voices.”

“But near the end of the week, Wednesday or something, people are running out, so coffee gets more expensive.  You got to pay a bunch of interest if you’re trying to get coffee from somebody.”

“Worst is you get here near the end of a week.  Cause even if somebody puts money on your books, it’ll take a while before they add your name to the list and you can get commissary.  So you’re getting everything on credit, people bleed you dry.”

#

In Money and Government, Robert Skidelisky addresses common misconceptions about the economy.

Many people are aware that the central bank has a mandate to “control inflation.”  This is very important to political donors – low inflation benefits people who already have wealth, at the expense of current workers.

But most people – including professional economists – think that the central bank controls inflation by manipulating the money supply.  This misconception might be a holdover from ancient history.  Long ago, only sovereigns could create money.  Kings and pretenders would mint coins as a way to flaunt their power.  And they’d unleash their full wrath upon interlopers.

The central bank is a little different.

If there’s too much money, which would cause prices to rise, the central bank is supposed to yank money out of the economy by selling bonds.  If there is too little money, the central bank is supposed to print more.

The central bank attempts to control the money supply this way.

At the same time, other banks are lending money.  If you decide to buy a house, you won’t call up the federal reserve – you’ll probably visit a few banks around town and apply for a mortgage.

Because most money doesn’t exist – it’s just a tally of credits and debits maintained on a server somewhere – a bank that gives you a loan is creating money. Modern banks don’t actually check whether they have money before they lend it to you.

Skidelsky includes a quote from Where Does Money Come From? by Ryan-Collins et al.:

The theoretical support for deregulation was based on the unrealistic assumptions of neoclassical economics, in which banks are mere intermediaries.  This does not recognize their pivotal role as creators of the money supply.

Since the 1980s, bank credit creation has expanded at a considerably faster rate than GDP, with an increasing amount of bank credit creation channeled into financial transactions.  This is unsustainable and costly to society.

Inflation has stayed low, because the amount of money available for purchasing real things hasn’t grown much.  Low inflation means that if people took on debt to go to college, that debt is often still hanging over them years later – inflation would make it easier to clear debt, because employers would respond to inflation by raising salaries.  The amount of debt relative to a week’s pay would fall.

Instead, the money supply in only one corner of our economy has ballooned, producing a flurry of destructive activity in the financial sector.

This has been lucrative for people willing to work in finance, though.

Skidelsky explains that:

The economic collapse of 2008-2009 showed that monetary policy directed to the single aim of price stability was not enough either to maintain economic stability or to restore it.  The economy collapsed, though the price level was stable.

Preventing a collapse in the money supply was to be achieved by what was euphemistically called ‘unconventional’ monetary policy: pump enough cash into the economy and the extra spending it produced would soon lift it out of the doldrums.

As it happens, the method that the central bank chose to inject money into the economy was perversely ineffectual.  The central bank gave money to wealthy people.

One strategy was “quantitative easing.”  The central bank paid people above-market-rate for low-quality financial assets. 

This helped the people who owned these particular low-quality financial assets – typically foolish wealthy people.  They should’ve lost a bunch of money.  They’d bought junk! But they didn’t, because the central bank stepped in to save the day.

Our central bank also fulfilled a small set of private companies’ insurance policies.  The corporations who bought absurd insurance from AIG should have lost all their money when AIG, unsurprisingly, was unable to fulfill their policies. 

If you’re in a high school cafeteria and somebody says, “I bet you a million dollars that …”, you shouldn’t expect the kid to pay up for losing the bet.  But our central bank intervened, giving huge amounts of money to destructive corporations like Goldman Sachs, because it wouldn’t be fair for them to win a bet and then not get the money (even though they’d been betting with a kid who obviously didn’t have a million dollars to pay). 

CODEPINK protests the AIG bailout bonuses in Los Angeles, 2009.

And yet, these tactics didn’t stave off financial recession.  Since the central bank only gave money to wealthy people, these recipients of our government’s largess had no incentive to actually spend the money. 

The main effect of the central bank’s reliance on “portfolio rebalancing” to boost output was to boost the portfolios of the wealthy, with minimal effects on output.  One doesn’t need headwinds to explain why.

#

“There’s a lot you can get in jail.  There were a couple years when people had all this spice, but they cracked down on that.  Still, you can get a blowjob for a couple Honey Buns, some guys will give you a stick for a soup … “

“What’s a stick?” I asked.  My initial assumptions were that it was either something sexual or drug-related, both of which turned out to be wrong.  A single soup would be pretty low to pay for drugs – soups are worth less than Honey Buns.

“Hey, ________, show him.”

A guy pulled down the front of his orange jumpsuit.  In gothic letters arcing across his chest, he had the words “WHITE TRASH.”  The skin around the letters was an agitated red.

“People think you need pens and ink for tats,” somebody said, “but most guys just use a staple and some burnt hair grease … “

The most popular black pigment for oil paints and acrylics is made of charred animal bones.  The calcium phosphate from bones is pale – the deep black color comes from carbon.  When you burn organic material, you’ll make buckyballs – small spheres of carbon like hollow soccer balls – as well as tubes of graphite.  And these molecules have high absorption across the visible spectrum.

Image of carbon allotropes by Michael Ströck.

Whenever a photon of visible light hits one of these molecules, the light is absorbed.  This causes an electronic transition.  But then the physical shape of the molecule doesn’t match its electronic structure, so the molecule begins to vibrate. 

By the time the molecule collapses back to its initial electronic structure – which ejects a photon – some of the energy that the molecule absorbed has been used up by vibrations.  So the outgoing photon will have lower energy.  It’ll be “infrared radiation,” which we can’t see.  So, colored light goes in, and then invisible light comes out – to us, it looks black.

Still, I hadn’t considered that you could burn the gunk that gathers on unwashed hair in order to make tattoo ink. Despite the brutal efforts of our government, people find ways to live even while incarcerated.

As in the world at large, many transactions in jail are made with hard currency.  If something costs a Honey Bun and two soups, you might be expected to hand over the food.  Sometimes, currency actually exists.

But people can create money, too. 

“Thanks, I owe you one.”

With those words, we gain the power of medieval kings.

.

Featured image by Andrew Magill on Flickr.

On currency

On currency

The value of money is a useful fiction.

As with most fictions, the story that we tell about money helps some people more than others. 

Money, in and of itself, is useless.  Gold, cowry shells, slips of paper with pictures of dead presidents.  The story makes us want these things.  We tell ourselves that these items can “hold value.”  Instead of lumbering about with all the goods we want to barter, we can carry a small purse of coins.  As long as everyone believes the same fiction, we can trade our apples for some coins, then later use those coins to pay someone to help us dig a well.

The story that money has value is most helpful for the people who already have money.

If everyone suddenly woke up from the story, and decided that coins were worthless, the people who grow apples would be okay.  In some ways, it’s less practical to pay people with apples – coins don’t bruise or rot – but it can be done.  Similarly, the people who dig wells would be okay. 

But the people who owned coins would be worse off – previously, the things they owned could be traded for other, inherently useful goods.  And people who had made loans would be much worse off – they would have given away money at a time when it could be used to buy things, and when they receive the coins back, they’ll be worthless.  No recompense for past sacrifice – only loss.

So people with current wealth benefit most from the fiction that money has value.

This is, as far as I can tell, the only real virtue of Bitcoins.  This form of currency is not anonymous – indeed, it works through the use of “blockchains,” a permanent ledger that records everyone who has ever owned a particular piece of money.  Bitcoins are a little like dollar bills where you have to sign your name on it in order to spend it.  And they’re excruciatingly bad for the environment – it takes energy to mint a real-world, metal coin, but nothing like the amount of energy that’s constantly wasted in order to verify the ledgers of who owns which Bitcoin.  Ownership is determined by vote, and the system was designed to be intentionally inefficient so that it’s difficult for one person to overwhelm the system and claim ownership of everybody’s coins.  And it’s unstable – it’s difficult for someone to outvote the system and take control, but not impossible.

Those all seem like bad features.  But Bitcoins are now incredibly valuable – in the years since I explained all these flaws to a high school runner who’d begun investing in Bitcoins, his $500 investment has burgeoned to be worth $24,000.

The only “good” feature of Bitcoins is that the system is designed to reward past wealth.  The total money supply approaches an asymptote – new Bitcoins are added to the system more slowly over time.  If the currency is successful, this will impose a deflationary pressure on prices.  Today, a certain amount of heroin might cost 0.1 Bitcoin – in the future, that same amount of heroin might cost 0.01 Bitcoin.

This deflationary pressure would cause the value of current holdings to increase.  By simply buying Bitcoins and hoarding them, you’d gain wealth! 

But this only works for as long as people keep believing the fiction that Bitcoins have value.  And the more people who buy and hold Bitcoins, as opposed to actively using them as currency, the less believable the story will be.  Anyone who “invests” in Bitcoins is wagering that other people will behave in a way that maintains the fiction, even though the person who is making the wager is actively undermining the story.

When we immerse ourselves in stories, we often need to temporarily suspend our disbelieve, but that particular set of mental gymnastics is too twisty for my mind.

Modern money barely exists.  Before, we spun stories about the value of coins – now, the fiction lends value to certain strings of numbers.  In addition to the Federal Reserve, any bank can create money by making a loan and claiming that a certain amount of currency has been added to one account or another.

This has allowed our fictions to become more intricate.  In 2008, the banking crisis threatened to make wealthy people much less wealthy – they had purchased certain financial assets that seemed valuable, and then these assets turned out to be worthless. 

It’s as though there was a certain new Magic card that everyone assumed was great, and a few rich kids bought all the copies of it, but then people finally read the card and realized it was terrible.  Now these rich kids are holding hundreds of copies of a worthless piece of cardboard.

This would be sad for those rich kids.  But, lo and behold, it was fixable!  If everyone can be forced to believe, again, that the item has value, then it will.  The story needs to be chanted more loudly.  If I paid $50 for this card last week, then it’s still worth at least $50!

That’s what “quantitative easing” was – governments around the world agreed to buy worthless items in order to convince everyone that these items had value.  This way, the wealthy people who had initially bought them wouldn’t have to suffer.

In the years since I’ve been teaching in our local county jail, I’ve struggled to comprehend the disparities between the way we treat poor people and wealthy people who made mistakes.

For instance, stock traders stole $60 billion from state governments across Europe – the trick was to have two people both temporarily own the stock around tax time, then they lie to the government and claim that they both had to pay taxes on it.  Only one set of taxes were actually paid, but they lie and claim two rebates.  Money from nothing!

From David Segal’s New York Times article:

A lawyer who worked at the firm Dr. Berger founded in 2010, and who under German law can’t be identified by the news media, described for the Bonn court a memorable meeting at the office.

Sensitive types, Dr. Berger told his underlings that day, should find other jobs.

“Whoever has a problem with the fact that because of our work there are fewer kindergartens being built,” Dr. Berger reportedly said, “here’s the door.”

They stole billions of dollars, and the question at stake isn’t whether they will be punished, but whether they can be forced to return any of the money. 

By way of contrast, many of the guys in jail are there for stealing $10 or so.  A guy did five months for attempting to use my HSA card to buy two sandwiches and a pack of cigarettes.  Another violated probation when he stole a lemonade – “In my defense,” he told me, “I didn’t even mean to steal it, I was just really fucking high at the time.

Two weeks ago, a dentist visited the jail during my class.  I go in from 4:00 p.m. to 5:30 – at about 4:15, a guard came to the door and barked somebody’s name.

“Med call?” somebody asked.

“Shakedown?” asked another.

The guard looked at the sheet of paper in his hand, then said “Dentist.”  And suddenly six guys started clamoring, “You got time for extras?  I gotta get on that list!” 

The man whose name had been called jumped out of his chair and sauntered to the door.

After he’d left, the guys explained the system.  “You can get dental, like real dental, but you have to put your name on the list and they only come like every five, six months.  So there’s no hope unless you’re gonna be here for a while.  And it’s kinda expensive, you pay like fifty for the visit and another ten for each tooth they pull.”

Apparently that’s the only service – pulling teeth.

“They do good work,” said the older man next to me, “I got these bottom two done here.”  And he tilted his head back and opened his mouth.  But I grew up wealthy – it’s hard for me to assess quality by eyeballing the blank gap between somebody’s teeth.

About twenty minutes later, the guy came back.

“Which ones you have them do?” somebody asked him.

“I had ‘em get these bottom three,” he said, although his voice was slurry because they’d loaded his mouth with novacaine.

“You idiot!  You didn’t have them get the top one?”

“No, man, that’s my smile!  Gonna find a way to save that tooth.”

“Man, see, how come I couldn’t be on that list?  I would’ve had ‘em pull a whole bunch of ‘em out.  Wouldn’t give ‘em no that’s my smile bullshit.”

As it happens, I’d gone in for a cleaning at my dentist just the day before.  And I’ve had braces.  Invisalign.  I suddenly felt rather self-conscious about my own perfectly clean, perfectly straight, perfectly intact teeth.

“So who was it, that lady doctor?”

“Naw, was the Black guy.”

“What?  Fuck’s it matter that he’s Black?”

“Nobody said it matters, it’s just, there’s three dentists, there’s the lady doctor, the Black guy, and then that other guy.  There’s just three, is all.”

“Oh.”

Our man was out eighty dollars after the visit.  Could’ve spent ninety, but he was holding out hope for that last one.  And they didn’t let him keep the teeth. 

I’m not sure the tooth fairy ever visits the county jail, anyway.

On free-market capitalism, political spending, and Jane Mayer’s ‘Dark Money.’

On free-market capitalism, political spending, and Jane Mayer’s ‘Dark Money.’

So-called libertarian economic philosophy — which has been having a larger and larger influence on mainstream politics over the past few decades — doesn’t make sense.  Which is too bad.  I like the basic ideas behind capitalism.

And I love liberty.

But there are major logical inconsistencies in the popular conception of free market capitalism.

Economist Robert Reich recently published Saving Capitalism to address some of these misconceptions.  In the first few pages of his book, he dismisses the distinction between free markets and government intervention:

Reich_SavingCapitalism_Book_v3The question typically left to debate is how much intervention is warranted.  Conservatives want a smaller government and less intervention; liberals want a larger and more activist government.  This has become the interminable debate, the bone of contention that splits left from right in America and in much of the rest of the capitalist world.

But the prevailing view, as well as the debate it has spawned, is utterly false.  There can be no “free market” without government.  The “free market” does not exist in the wilds beyond the reach of civilization.  Competition in the wild is a contest for survival in which the largest and strongest typically win.  Civilization, by contrast, is defined by rules; rules create markets, and governments generate the rules.

A market — any market — requires that government make and enforce the rules of the game.  In most modern democracies, such rules emanate from legislatures, administrative agencies, and courts.  Government doesn’t “intrude” on the “free market.”  It creates the market.

Some would have you believe that, in a world of free-market capitalism, producers would extract oil from the ground however they want, process it however they want, sell it to whomever they want, keep the entirety of their spoils, then spend that money however they want.

This is, sadly, not what would happen in a world free of government intervention.

Instead, roving warlords would conquer the oil reserves.  Or the refinery.  There would be no money, so oil would have to be bartered for other goods.  But someone bringing huge quantities of oil to the market would likely be murdered, their possessions stolen.  It would be difficult to maintain inequality as extreme as we have in the contemporary United States, because the wealthy would pay huge sums to employ bodyguards.  Greater concentrations of wealth would lure greater extremes of violence.

But this is not the world that self-proclaimed libertarians envision.  Instead they support rules that favor the already wealthy; they claim that the peculiar set of rules they favor is free-market capitalism.  It is not.

This contrast is lucidly described in a passage from Matthew Desmond’s Evicted.  He focuses on the housing rental market, but his analysis applies equally well to many realms of our economy:

unnamed (3)Those who profit from the current situation — and those indifferent to it — will say that the housing market should be left alone to regulate itself.  They don’t really mean that.  Exploitation within the housing market relies on government support.  It is the government that legitimizes and defends landlords’ right to charge as much as they want; that subsidizes the construction of high-end apartments, bidding up rents and leaving the poor with even fewer options; that pays landlords when a family cannot, through onetime or ongoing housing assistance; that forcibly removes a family at landlords’ request by dispatching armed law enforcement officers; and that records and publicizes evictions, as a service to landlords and debt collection agencies.  Just as the police and the prison have worked to triage the ill effects of rising joblessness in the inner city (like social unrest or the growth of the underground economy), civil courts, sheriff deputies, and homeless shelters manage the fallout of rising housing costs among the urban poor and the privatization of the low-income housing market.

Without government intervention, the plight of the urban poor would not be nearly so miserable as it is today.  Landlords could not stake claims to huge numbers of properties throughout a city, because the impoverished would simply claim a place to live and retaliate with violence if a landlord asked them to leave.

This is the basic reason why I support progressive income taxes (and progressive wealth taxes, too).  I think that people should fund government to the extent that their life would become worse without it.  The poor are kept poor by our existing rules.  They cannot take the things they need.  I think they should pay a negative tax, i.e. receive an income supplement.  The wealthier someone is, the more likely that person would be murdered and robbed without the protections of government.  I think it is eminently reasonable for the wealthy to pay a higher percentage to maintain our current order.

9780385535595Of course, several extremely wealthy people do not agree with me.  As Jane Mayer documents in Dark Money, these individuals have used their wealth to promulgate a philosophy very different from my own.  Everybody knows that politicians can be bought — and cheaply, too, with hundred thousand dollar campaign contributions often resulting in million dollar lawsuits being dropped.  Well, academics can be bought, too.  University professors expend so much effort scrabbling for grants that it was unsurprising to learn how a few targeted donations led to steadfast ideological purity throughout the recipients’ careers.

These wealthy individuals (the Koch brothers, among others) self-describe as free market capitalists.  They claim to favor extremely limited governance, but their actions bely these claims.  In Mayer’s words,

Singer [who ran a hedge fund that bought “distressed debt in economically failing countries at a discount” then took “aggressive legal action to force the strapped nations, which had expected their loans to be forgiven, to instead pay him back at a profit”] described himself as a Goldwater free-enterprise conservative, and he contributed generously to promoting free-market ideology, but at the same time his firm reportedly sought unusual government help in squeezing several desperately impoverished governments, a contradiction that applied to many participants in the Koch donor network.

The wealthy political donors arguing for less government intervention in the economy are precisely those people who have benefited most from government intervention.  They might argue that their position is internally consistent because they feel that the sole function of a just government is the protection of property rights.

But this is nonsense.  All property carries a history of violence — government protection of “property rights” simply chooses an arbitrary cut-off date and legitimizes all violence that occurred on or before that date, while threatening violent reprisal against those who do not respect ownership claims from after that date.

Furthermore, the environmental regulations that Charles Koch denounces are property rights.  If you own a farm and somebody comes with a gun and tells you, “Get out, it’s mine now,” it’s pretty clear that the government has not protected your property rights.  But this isn’t so different from someone coming and setting fire to your farm — you used to have it, now you don’t.  It isn’t so different from someone starting a huge fire on their own property and letting the flames spread to yours.

And it isn’t so different from someone pumping out toxic sludge just upstream of your farm.  Your land was useful — it could grow food fit for human consumption.  If someone dumps a bunch of mercury upstream, now it can’t.  Most of the value of your property is gone, just as if someone had come and set fire to it.

If a corporation buys the land adjacent to your home and puts in a concentrated animal feeding operation, again, much of the value of your property will vanish.  It’s hard to breathe near those things, and most homeowners like to breathe.

Indeed, if you run a company that digs up coal or oil for people to burn, you should expect the government to tax your industry if you care about property rights.  Because your industry is wrecking property all over the globe.  At minimum, you should expect to compensate others for the losses you’re causing — that’s if a government protecting property rights would even allow you to churn out all that toxic waste.

But not everyone agrees.  In Mayer’s words,

Jane_mayer_2008The problem for this group [of oil & coal profiteers] was that by 2008 the arithmetic of climate change presented an almost unimaginable challenge.  If the world were to stay within the range of carbon emissions that scientists deemed reasonable in order for atmospheric temperatures to remain tolerable through the mid-century, 80 percent of the fossil fuel industry’s reserves would have to stay unused in the ground.  In other words, scientists estimated that the fossil fuel industry owned roughly five times more oil, gas, and coal than the planet could safely burn.  If the government interfered with the “free market” in order to protect the planet, the potential losses for these companies were catastrophic.  If, however, the carbon from these reserves were burned wantonly without the government applying any brakes, scientists predicted an intolerable rise in atmospheric temperatures, triggering potentially irreversible global damage to life on earth.

And, the solution?  Well, the real free market solution is simply to tax negative externalities so that harmful industries can make the correct cost benefit calculations.  If producers reap all the benefits but costs are spread over the entire population, they’ll make too much of a thing.

Indeed, this is a commonly-cited rationale for capitalism: back when many people’s wealth was their livestock, partitioned land holdings was seen as a cure for the tragedy of the commons.  A major cost of raising animals is feeding them, and without private land holdings everyone has an incentive to overgraze.

So, sure, I guess there’s another answer.  We could carve up the atmosphere, trap air in discrete boxes, try to stop all diffusion between them… and then allow the Koch brothers to pump out as much carbon dioxide as they want into their own home’s air.  Presumably they would make different choices, no government regulation required.  Or die — most laboratories gas dissection-bound mice with carbon dioxide.

But these solutions would make it slightly more difficult for our country’s wealthy to continue accumulating mind-boggling quantities of money.  So they’ve chosen a different plan: buy a bunch of academics to churn out philosophical nonsense nearly as toxic as the effluents from their industrial processes.  It’s depressing that this was so successful.

But let’s face it.  Philosophy is dull.  Economics is hard.  When enough people with fancy credentials trumpet nonsense loudly enough, it seems, people will believe.

In Mayer’s words,

When these donors began their quest to remake America along the lines of their beliefs, their ideas were, if anything, considered marginal.  They challenged the widely accepted post-World War II consensus that an activist government was a force for public good.  Instead they argued for “limited government,” drastically lower personal and corporate taxes, minimal social services for the needy, and much less oversight of industry, particularly in the environmental arena.  They said they were driven by principle, but their positions dovetailed seamlessly with their personal financial interests.