Well I did it. After much agonizing over how to place my macroeconomic analysis before the public, I submitted a copy to Factsheet Five. FF5 presents reviews of the cornucopia of crazed cries from wannabe writers/publishers who have yet to find their way into the world of commercial publishing. Aside from offering insight into the offerings of the underground press, this journal of the offbeat is an excellent source for disinterested review of one's ventures into going public. This review of my analysis appeared in issue #39, dated December 12, 1990.
John B. O'Donnell, THREE STEPS TO ECONOMIC FREEDOM: Subtitled "An
exposition of the causes of economic stagnation and their remedies",
this booklet proposes establishing a stable currency, taxing monopoly,
and then distributing dividends to citizens as steps to prosperity.
It's a mix of economic theory, post-Georgist thinking, and computer
simulations, with different simplifying assumptions than economists
usually use. I can pass no verdict on its plausibility, but at least
most of what O'Donnell has to say can be understood in only one or two
readings, in contrast to my economics text from college. (S-48t/MG)
The parenthesized code at the end of the review identify the size (Standard 8-1/2 x 11, 48 pages, typeset) and the reviewer, Mike Gunderloy. Although FF5 has a Curmudgeon Corner written by its "Official Curmudgeon," Mike is the chief editor of this irreverent group of irascibles and probably deserves the title. His is a style that can only have been acquired through many years of reviewing as mixed a bag of subject matter as can be imagined. I have had many who have made suggestions of how to make this most mundane of subjects understandable, but this is the first time it has been said that it "can be understood in one or two readings." Thanks, Mike. Your few words have broken a long period of frustration in attempting to overcome that hurdle.
You have also provided an excellent recommendation I can now pursue. Yes, Mike, it is true that macro-economics is that simple. But, I must agree that "if its too good to be true it probably isn't" is usually reasonable advice. Your few words of doubting its plausibility open the door to my next task. Thanks, again. And, I must not forget to also thank you for such a thorough description of the contents. It is quite amazing what a true artist can do with so few words.
Among the many reasons that this analysis may seem so implausible are the things omitted from this analysis that are so often taken as important to economists' pontificating with their regurgitations of conventional wisdom. Perhaps the most objectionable of these omissions in today's economic environment is the concept of government debt. Accounting of the government debt by conventional economic procedures gives the impression that we are headed for a crisis the like of which has not been seen since the 1930's. Part of the alleged debt crisis is the possibility that the government will have to "bail out the banks" much like it had to rescue the Savings & Loan industry. This, of course, means that the government will have to take on even more debt. A frightening possibility in the view of conventional economics.
My arguments here will not be with the conclusions economists may reach. For one thing, those conclusions are too varied and contradictory to even attempt to discuss. My arguments are only with their use of irrelevant accounting measures to reach their conclusions. These measures may be meaningful for ordinary financial institutions, but for governments in charge of issuing currency, they are meaningless.
The reason these measures become meaningless for these governments is because they can maintain no meaningful accounting balance of assets and liabilities. Consider this short exercise that would technically solve first the solvency of the FDIC (Federal Deposit Insurance Corporation) "trust fund" or any other so-called trust fund of the federal government. Then we'll attack the problems of government debt and deficits.
Neither of these exercises will actually make sense nor will they "solve" any real problems. But, they do show the meaninglessness of using conventional accounting procedures without a meaningful asset/liability balance accounting. A meaningful solution for the FDIC trust fund will be presented later.
The FDIC is currently in trouble because the failure of numerous banks has significantly depleted the FDIC trust fund. To correct this problem let's have Congress appropriate $1 Trillion to support this fund. (A process they do on occasions with other trust funds.) Rather than go through the expense of having the Treasury sell bonds to cover this debt (A process that only enriches the likes of Mike Milken and his ilk.), let's just have the Treasury issue bonds directly to the trust fund. It would only invest the money in government bonds anyway. The trust fund problem is solved and nothing has really changed.
"Oh, the government debt has increased, and that means there will be bigger deficits to pay the interest on these bonds!" you say. The budget deficit (@ 10% interest) will increase by $100 billion per year."
We had better look at the government debt as presented in Monetary Trends, (Nov., 1990), a publication of the St. Louis Federal Reserve Bank: (Dollar amounts in Trillions)
Date: June, 1990
Gross Federal Debt $3.1469
Held by Trusts $ .7658
Held by Fed.Res.Banks $ .2302
Privately held $2.1484
The budget deficit for 1990 is reported as $.2204 Trillions
in the same source.
After our little exercise the debt and deficit are now:
Gross Federal Debt $4.1469
Held by Trusts $1.7658
Held by Fed.Res.Banks $ .2302
Privately held $2.1484
The budget deficit for 1990 with these changes would
have been $.3204 Trillions.
Significant numbers indeed. Or, are they? What has actually changed. Has there been any increase in taxes? Has any obligation of the government changed? Was inflation increased? Of course not. These numbers are meaningless. We can just as easily go the other way.
Let's now have the Congress demand the Federal Reserve turn over the debt it holds to the Treasury, a procedure that is done at it's pleasure whenever it choses. While we're at it, let's have Congress take the trust fund bonds as well. They don't ordinarily do this, but what's to stop them? And, if they were to respect their own definitions concerning the collection of Social Security taxes there would be no misleading "trust fund" nonsense.
[Social Security taxes are _NOT_ earmarked for any specific purpose, they are indirect taxes paid directly into the federal treasury. That is, they are _NOT_ insurance payments. See the Social Security Act or Supreme Court ruling in Steward Machine Co. vs Davis, 301 U.S. 548]
Now the debt and deficit accounting look like this:
Gross Federal Debt $2.1484
Held by Trusts $ .0000
Held by Fed.Res.Banks $ .0000
Privately held $2.1484
The budget deficit for 1990 would now be $.1208 Trillions
(Assuming the same 10% interest rate.)
Again, nothing has changed! No new taxes. No different obligations. No change in inflation. Just a bunch of meaningless numbers.
None of this solves the problem of creating meaningful measures to control the miscreant mavens of policy but, it does show that the measures being used only obfuscate the issues. They provide no guidance whatsoever to economic policy.
There is another thing we can demonstrate about this accounting system before we examine a meaningful approach to FDIC insurance. That is, we can do what many economists propose as the solution to the current recession. We can "loosen" the money supply. This is done by having the Federal Reserve System buy some of the outstanding debt of the government.
We won't do this in the fuzzy, indefinite, buy some debt manner suggested by these experts. We will take the very specific action of doing all that can be done in this regard. We will have the Federal Reserve buy all the outstanding government debt. Starting where we left off, our accounting system would then look like this:
Gross Federal Debt $2.1484
Held by Trusts $ .0000
Held by Fed.Res.Banks $2.1484
Privately held $ .0000
The budget deficit for 1990 would have been unchanged
at $.1208 Trillions.The curious thing about this action is that neither the total debt nor the deficit would be changed. However, the same cannot be said for the effect this would have on the rate of inflation. While it cannot be established just how significant that effect would be, few, if any, economists will deny that it certainly would be very significant. We can now see that while meaningless actions significantly affect the budget measures, meaningful actions have no effect!
We could, of course, follow this action with the return of all Federal Reserve held bonds to the Treasury and thereby eliminate the debt and turn the deficit into a surplus like so:
Gross Federal Debt $0.0000
Held by Trusts $0.0000
Held by Fed.Res.Banks $0.0000
Privately held $0.0000
The budget SURPLUS for 1990 would have been
$.09484 Trillions.
All of this just further illustrates the meaninglessness of this accounting system but, I earlier said I would show how to resolve the FDIC solvency problem. To do this we will now look at some possible measures to meaningfully guide bank regulators in issuing deposit insurance.(Arguments showing rational Federal Reserve actions to maintain a stable currency are in THREE STEPS TO ECONOMIC FREEDOM.)
The first issue to resolve is Why have deposit insurance? Is it to "bail out the banks" as suggested by many? Or, is it simply to ensure we have a safe and convenient way to conduct business?
Because any bank requiring FDIC insurance payouts suffers the loss of all the owners equity, it cannot be said the insurance is for the benefit of bank owners. It must, therefore, be to ensure safety and convenience of banking customers. However, most of the conventional arguments to charge for this government service assume we must create a trust fund in order to pay off depositors in failed banks. Because of this perspective, all banks are charged the same rate based only on the amount of insured funds. Since we have already shown that the so-called trust fund provides no benefit to banks, why should they be charged for this insurance? Why not just provide it out of general revenues of government?
The answer to this last question also provides the answer to how the cost of this insurance should be collected. If no charge were made, troubled banks would assume any risk on the remote chance they may recover before they experience total collapse. Therefore, the charge for this service should be established to reduce the risk of bank failure.
This risk is essentially the degree to which bank liabilities (insured deposits) are exposed to market losses. The ratio of insured deposits to bank equity measures the risk the government may have to pay off depositors. If a bank is charged proportional to the square (or cube) of this Risk Factor, then deposit growth will not be a rational alternative and there will be less risk of bank failures.
For example, let us compare two banks. Both are capitalized at $1 million. The first bank is conservative and has deposits (insured liabilities) of $10 million. The second bank is one of the go-go types and has $100 million in deposits it obtained by offering high interest on deposits. (Offering high interest is how banks grow.)
This scenario gives the first bank a Risk Factor (RF) of 10 ($10 million insured liabilities divided by $1 million in equity.) The second bank has an RF of 100. If the government charge is ten cents per month for each million dollars of insured deposits times RF squared (or cubed) then the first bank, essentially risk-free with little chance of the government having to pay off depositors, would pay only $100 (or $1,000) per month [$0.10 x 10 x 10**2 (or 10**3)] for the insurance. The second bank, however, would have to pay $100,000 (or $10,000,000) per month. Enough to restrain even the most venturesome gambler from getting into trouble.
The point of all this is not to suggest these steps should be taken (although it would be a good method of charging for deposit insurance), it is simply to demonstrate that much of what we perceive to be truth is no more than misplaced belief in a "science" that is as unreliable as the "facts" professed by religious zealots.