Inflation and all that

Hey everybody, inflation’s back in the headlines! Suffering from social embarrassment because you can’t follow discussions of economic policy? Lonely because that cute guy you like only dates girls who understand the Taylor Principle? Have you been bullied because you confused the Fed and the Treasury? We’re here to help! Here’s a primer on US monetary policy and related matters.

Executive summary: Inflation is a rise in the general level of prices of goods and services. In the long run inflation is caused by increasing the amount of money in circulation.

1. The Federal Reserve System. The USA’s central bank. A central bank is not actually a bank. It’s the part of the government that prints the money.

(The issuers of various kinds of US money are the Federal Reserve System, the Treasury, and the Mint, jointly. But the first of these is the institution that handles monetary policy; see below.)

Everyone calls the Federal Reserve System “the Fed.” The Fed was legislated into existence in 1913. Aside from controlling influencing the supply of money, it has the power to create regulations that affect broad swathes of the financial sector (particularly banks), and to “interpret” regulations created by Congress and the President.

2. “Dollars.” The two most liquid forms of dollar-denominated assets are literal paper dollars and dollar-denominated electronic reserves. Electronic reserves are simply numbers in a Fed computer. Those numbers are assets of commercial banks (i.e. actual banks) and similar financial institutions. Banks can have reserve accounts at the Fed. You and I can’t.

Electronic reserves are money for two reasons: One reason is that everyone accepts them as money, i.e. as media of exchange. You go to the sex store and buy a 5-gallon barrel of lube, a 7-speed vibrator, and a pair of crotchless panties for $100. You swipe your card through the reader and payment has been made.

(This process decreases the balance in your checking account by $100 and adds $100 to the sex store’s account at its bank (or similar financial institution). The two banks talk to each other, via the Fed, which debits your bank’s reserve account by $100 and credits the sex store’s bank’s account by $100. BTW, the process is not actually as instantaneous as it seems. Also, it’s not always mediated by the Fed, which subcontracts out some of this payments-clearing stuff.)

The second reason that electronic reserves are money is that if a bank requests it, the Fed will ship paper money against their electronic reserves at one-for-one. E.g. the Fed will lower the bank’s electronic reserve account number by $50 million and ship it $50 million in paper dollars in an armored truck.

While I’m on the subject: take out a dollar bill and note the “legal tender” language. This is what people mean when they call dollars “fiat money”: another reason they’re money is legal fiat. See below for more.

3. Treasury securities (bills, notes, and bonds). Yes, this is relevant for monetary policy; bear with me. These are basically IOUs the Treasury sells when the federal government needs to borrow money. The buyers of these securities are lending money to the federal government. The simplest version of this is a piece of paper which— well, they’re not generally paper any more, but anyway— a piece of paper that works like this: A 6-month Treasury note, which the Treasury sells on June 1, 2022, says

“The US Treasury will pay the holder of this piece of paper $1,000 on December 1, 2022.”

On June 1, 2022, someone buys that note for some amount smaller than its face value of $1,000. (The price the Treasury can get for it is determined by conditions in financial markets.) That allows the buyer to earn interest. For example, say you buy it for $990 on 6/1/22. Then on 12/1/22 when the Treasury gives you $1,000, you have gotten back the $990 you lent to the government plus $10 of interest. So you’ve earned a six-month interest rate of $10/$990, or about 1%. (Note this is not the implied yearly interest rate.)

So the note earns interest because it sells at a discount from its face value. So this is called a discount bond. Since it makes no “coupon” payments before its maturity it’s also called a no-coupon bond. Coupon bonds make a sequence of payments, at least one coupon payment before their final payment.

State and local government bonds and corporate bonds work the same way, terms of their basics, as Treasury bonds.

4. Why do some people say that (a lot of) modern money is “debt”? First note that money is anything that is generally accepted in exchange for goods and services. (“Money” is defined by a list of several features, but that’s the headliner.) If I can go into a sex store and walk out with a 5-gallon drum of lube, by swiping a card that’s connected to my checking account, then the number in my checking account is money.

Thus, impeccably conventional measures of the money supply include numbers in checking accounts. (The way the law usually works— things are different at the moment due to COVID— is that for every $1 in electronic reserves that a bank has, it’s allowed to have up to $10 in checking accounts on its books.) Notice something: While the number in your checking account is an asset from your point of view, it’s a liability from the bank’s point of view. Why? Because they have to surrender that money if you direct them to. They have to either give you paper dollars or they have to make payment to a third party (the sex store, e.g.) when you swipe your card or write a check.

So a lot of modern money is something that appears on the liability side of some financial institution’s balance sheet. Thus, debt.

5. Monetary policy. The changing of the money supply to achieve certain economic goals, one part of economic policy. There is more than one kind of monetary policy, especially in, say, a pandemic in which the Fed is crazily improvising, but normally the main one is a simple thing with a complicated name: open market operations (OMO).

OMO is simply the Fed buying and selling Treasury securities.

When the Fed wants to raise the money supply by say $10 billion, it simply buys $10 billion of Treasury bonds (bills, or notes, whatevs). It credits the bond sellers’ accounts (or their banks’ accounts) with $10 billion of reserves. Where do those reserves come from? The Fed just types them up. People at the Fed raise the number in the reserve accounts in the Fed’s computers.

So the Fed has removed $10 billion of T-bonds from the economy and injected $10 billion of money. This increases the supply of money, colloquially “printing money.”

If the Fed wants to decrease the money supply it sells bonds. The Fed gives (say) $10 billion of T-bonds to various bond buyers, and they make payment by giving the Fed $10 billion of reserves. Then the Fed destroys those reserves. How? It just lowers the number in the relevant reserve account. Where does that money go? Like love in that old J. Geils Band song, it’s gone, that’s all.

6. Inflation. Inflation is a rise in the general level of prices of goods and services. In the long run, inflation is caused by money creation.

Everyone in the world who is knowledgeable about this topic knows how to stop inflation: Stop printing money. This might not happen for two possible reasons. One reason is that the central bank believes (rightly or wrongly) that the economic costs of stopping the inflation would be worse than the inflation. The other is political stuff. E.g. maybe the government’s executive branch is (for various reasons) pressuring the central bank to continue the money printing.

7. Interest rates. What’s all this talk about interest rates in monetary policy? While monetary policy is (by definition) the changing of the amount of money in circulation, most central banks usually think about policy through an interest rate channel. That is, the supply of money affects interest rates— take this on faith please; this post is already longer than I planned— and interest rates affect other stuff that we actually care about, like GDP, the unemployment rate, etc.

When you contract the money supply you stop and indeed reverse inflation. You also (in the short run) cause interest rates to go up (take on faith). So people say things like “We need to raise interest rates to stop inflation.” I think this is an unfortunately roundabout way of expressing it.

8. Miscellaneous items.

(A) Because central banks often think about policy in an interest rate way, here’s an important distinction: Nominal interest rates are not adjusted for inflation. Real interest rates are.

Provided the numbers involved are not too large, the adjustment is extremely simple: The real interest rate is just the nominal interest rate minus the inflation rate. Ex: If the nominal interest rate is 7% and the inflation rate is 4%, then the real interest rate is 3%.

If a central bank is going to think about monetary policy in the (unfortunately roundabout, IMHO) interest rate way, it’s important to make sure that it’s adjusting the real interest rate in the right direction in response to events. Thus it is a truth universally acknowledged that a zombie in possession of brains must be in want of more brains. I mean, it is a truth universally acknowledged that when inflation rises, the nominal interest rate must rise even more, to make sure the real interest rate rises. (This called the Taylor Principle.) Fed policy over the last 8 months or so has not been respecting this principle, which everyone at the Fed is aware of. The reason for this is…?

(B) Fiat money. “Fiat” means force. Fiat money is supported by force because e.g. if you don’t want to pay your taxes in dollars the IRS guys won’t be amused, and legal compulsion will enter the situation. Try to pay your taxes next year in Doritos or fish heads; observe results.

(C) “The Fed’s balance sheet.” When the Fed buys Treasury bonds or other kinds of securities it holds them on its balance sheet. The dollar-denominated reserves that the Fed created to buy those securities are booked as a liability on its balance sheet. (Though they’re not really a liability in any economically meaningful sense.) For this reason, when the Fed creates money, the gross size of its balance sheet grows. The net size doesn’t change, since newly-acquired assets (T bonds or whatever) are matched by an equal amount of newly-created liabilities (electronic reserves). My point being: When finance-y people say “The Fed’s balance sheet has grown” they’re saying, rather obliquely, “The Fed has been printing money.”

Recent Inflation

Twelve-month inflation rates. It’s impossible not to notice the trend.

Mar 2020 – Mar 2021:    2.7
Apr 2020 – Apr 2021:        4.2
May 2020 – May 2021:    4.9
June 2020 – June 2021:    5.3
July 2020 – July 2021:    5.3
Aug 2020 – Aug 2021:    5.2
Sept 2020 – Sept 2021:    5.4
Oct 2020 – Oct 2021:        6.2
Nov 2020 – Nov 2021:    6.8
Dec 2020 – Dec 2021:    7.1
Jan 2021 – Jan 2022:        7.5
Feb 2021 – Feb 2022:        7.9
Mar 2021 – Mar 2022:    8.6

Source data: Federal Reserve Economic Data. The are different ways of calculating consumer prices so other sources may give somewhat different results. But the trend is not in doubt.

While I’m on the subject, here’s the price of oil. The current upward trajectory in oil’s price started in April 2020, almost two years before FASCIST NAZI HITLER PUTIN’s!!!! invasion of Ukraine. Yet every Democrat from Biden on down is saying “The rise in oil prices is Putin’s fault.” It’s amazing how freely and unhesitatingly Democrats lie, even about the most easily checkable matters.

Why Socialism Doesn’t Work, the Short Version

Imagine that every day at midnight, every person in the world randomly switched bodies.

What would happen? Everyone would eat their favorite foods with no regard for the health consequences. No one would ever do any exercise, except for kinds of exercise which are inherently enjoyable. There’d be a lot of smoking, drinking, and doing drugs, etc., because we’d face no long-term health consequences of such. Obviously the health of the human race would deteriorate horribly. We might even die off.

This is what happens when there is no property, when people have no stake in the long-term management of a resource or asset.

Stop Paying Attention to Moldbug

Pardon me while I give Moldbug a good beating here, but I’ve had enough. He is dangerous, because he somehow gets people to take his flatulent amateurish bloviations seriously.

On the thousand-to-one chance that Moldbug reads this: I’m sorry, man, but I believe this is for the Greater Good.

To skip directly to the main example of this post, do a search for the word “finance” (search is CTRL+F in most browsers).

The gentlest thing I can say about Moldbug’s fanboys is that they mistake style for substance. References to obscure historical episodes… florid vocabulary… a deliberately “iconoclastic” way of looking at things… These are not intelligence; they are the superficial symbolism of intelligence. It is as if Moldbug were to write a 10-page “proof” that 3 is not a prime number, complete with… ACTUAL FOOTNOTES!!! And people take him seriously because of this. The presence of ACTUAL FOOTNOTES!!! does not change the fact that what he’s saying is that 3 is not a prime number. Ignore the style, goddammit.


As a prolegomenon (Note fancy vocabulary! I’m awesome!) I can think of things that Moldbug gets right, but they’re obvious. One, in his oft-cited writings like and, Moldbug takes thousands of words to assert that democracy doesn’t work in reality the way it does in textbooks. No shit. Everyone already knows this. Better writers could illustrate it in two words, e.g., “corporate welfare” or “unnecessary wars.” Granted, belaboring the obvious has value– the obvious needs all the belaboring it can get these days– but let us not confuse the necessary work of obviousness-belaboring with profound and brilliant insight.

(In this blog I sometimes belabor the obvious, with occasional original (I hope) insights. As far as I know, the obviousness-belaboring has not yet prompted anyone to assess me as an Einstein-level Galaxy Brain.)

Two, as I noted here, Moldbug correctly observes that leftism does not lose steam when it exacts concessions. Trying to deny it steam by partially giving in to it has never worked. But again, he is hardly the only person to have noted this.

Now to fisk two specimens of stupid Moldbug notions; they could be multiplied vastly.

First, Moldy denies that the Nazis and fascists– the real ones, from Europe in the first half of the 20th century– were left-wing; he claims they were “right-wingers” and “reactionary.” This statement is wrong, regarding the Nazis. That Moldbug asserts it is… puzzling, because his various references reveal that he understands these things well enough to know better. He knows the salient facts about the National Socialist German Worker’s Party.

About Italy’s Fascists, Moldbug’s own attempt to establish their non-leftist nature is tragically inept. He cites many facts all proving that they were leftists, but quotes one Nitti, a contemporary of Mussolini, who characterizes Mussolini as “white,” i.e. reactionary in the political color coding of that time and place. Funny. There’s a blast of facts that show Mussolini as, first a Communist, and later, apparently still a Communist but in a non-Communist costume. Then we get one person calling him an anti-Communist. Maybe some of the evidence that led to Nitti’s assessment? None that’s at all persuasive. Moldbug quotes Nitti bewailing that under Mussolini, “All form of liberty has been suppressed; press liberty, association liberty…” Does that sound left or right? And this is presumably Moldbug’s best stab at proving Mussolini was a “reactionary.” If he has more evidence, why hide it? Well, if the best you can do still paints him as a Commie, I think we’re done here.

I realize there are those who think that Moldbug uses an incredibly subtle rhetorical technique of saying things other than, perhaps the opposite of, what he means. There are two problems with this notion. One, there are places in which he plainly says what he means, e.g. when he points out that democracy in practice bears little resemblance to democracy in theory. This puts his readers in the awkward position of having to judge whether any given claim is advanced seriously or impishly.

Two, this technique cannot be used on the people who need it most. Consider the notion that Mussolini was really right-wing, argued so ineptly that it convinces you that he wasn’t right-wing. That technique would never work on the leftists whom Moldbug wants to convince. Never in a million years are they going to read that closely. They “know” that Hitler and Mussolini were right-wing, and when they see an argument to that effect they are going to accept it at face value. They are not going to carefully interrogate it to detect any flaws and then be convinced of the opposite. Sheesh.

I was in several bands when I was younger. One thing I noticed with amusement is that no matter what your band name or your song lyrics, people often interpreted them as being about sex or drugs. If the name of your band was “the Screaming Eagles” people would find a way to interpret that as being about sex or drugs. I think Moldbug’s fanbois do that: They want a clever dissection of the modern political consensus, so they “find” it. Moldbug is a Rorschach test, whatever else he is.

Now for a long-form ass-kicking. Thanks to SimplyConnected for providing me (a couple of years ago) this Moldbug link on finance. If you are still a Moldbug fanboi after reading this, I can’t help you, tovarisch.

(NOTE! Use of Russian for no particular purpose or reason! I must be “clever”! And therefore my political views must be right!)

First, he wants total “commanding heights” socialism:

Step one: Nationalize all market-priced financial assets at the present market price, exchanging them for new dollars. USG buys all publicly-traded American securities, and foreign securities held by Americans. It thus becomes the sole owner and operator of all public[ly traded] companies, and in doing so it also acquires all the banks (for the price of their common stock, which is not much these days). By acquiring all the banks, it acquires all their dodgy mortgages and other “bad” securities. Obviously, after this process, all debts USG owes to itself are cancelled.

Hedge funds, private equity, and other exotic assets held by individuals may require some appraisal…

Stop. Hedge funds and private equity are not “assets.” They are investment organizations that manage assets. Hedge funds are basically mutual funds that wear tight black leather pants and 4-inch spike heels and carry a knife. Private equity firms buy controlling interests in companies’ stock and hope to manage the company better than the current management, often with the intention of selling their stock after it has (they hope) appreciated. HFs and PE hold assets, but they are not assets. Is this a nit-pick? No, because most of the assets they hold – thinking mainly of hedge funds here – are already included in the “market-priced financial assets” that Moldbug mentioned in his previous paragraph. That he doesn’t grasp this should by itself make his fanbois question his guru status.

We continue:

Hedge funds, private equity, and other exotic assets held by individuals may require some appraisal. But these are held by rich people, who are patriotic [snort, I suspect this is an example of Moldy saying the opposite of what he thinks] and don’t mind taking a bit of a haircut [LOL, ditto]. Also requiring appraisal are homes; if you are a homeowner, USG calculates your home equity (perhaps using an automated appraisal, such as Zillow’s), and buys it from you. You are now a renter; USG is your landlord. Your new rent is calculated as a percentage of your home appraisal.

The result of step one is that USG owns all financial assets, major corporations, and real estate.

The government owns the bulk of assets. What could possibly go wrong?! Historically, that has always worked out well! I imagine his fans saying, “That doesn’t matter, because if you keep reading you’ll see that his plan involves the government selling all that stuff back to us.” Yeah, about that…

Moldbug continues by telling us that he wants to basically triple a major measure of the money supply:

In return, each USG citizen has one number: how many dollars they have. Perhaps the most straightforward way to implement this is to give every American a direct account at the Federal Reserve (a privilege now held only by banks). Thus, all your portfolios are automatically sold at the current market price, and your statement is mailed from the Eccles Building. [There is no reason to mention the Eccles Building, tovarisch.] The little number at the bottom, however, is the number you care about. This number has not changed. If your portfolio was worth $250,000, you now have $250,000.

Step two: Triple each of these dollars. If your portfolio was worth $250,000, you now have $750,000.

Oh my, he’s going to (basically) triple electronic bank deposits. Sooner or later that will result in serious inflation.

Then a debt Jubilee:

Thanks to our cleanup, these debts are now held by USG itself (which acquired them from the old financial institutions). There is no reason for USG, which can print dollars, to be squeezing them out of the hides of the poor. Forgive them all. Call it a Jubilee.

I don’t know what its direct effects would be– and neither does Moldbug or anyone else– but there are serious long-run implications of baking expectations of future Jubilees into people’s beliefs.

What’s that you say? You’re a Moldbug fanboy and you can’t see a problem with setting a precedent for debt amnesties? Well, can you see any long-run problems with setting a precedent for immigration amnesties?

Please tell me that just made you go, “Um, wait a minute…”

Moldbug apparently is also afraid that tripling everyone’s money won’t cause enough inflation, so he says,

Step three: Calculate the expected shortfall in future entitlements (Medicare and Social Security), and print new dollars to fill the gap. (About 50 trillion of them, to be exact.) For extra credit, print unripe dollars (bonds) and issue them directly to the actual entitlement recipients, as per the actuarial value of their policies.

On top of all the other money printing, an additional fifty trillion dollars.

He then says,

We are going to break this printing press. But before we break it, we have to use it…

No, you’re not going to break the government’s ownership of the money printing press. If we can’t even force the current government to respect the Constitution, how are we going to force future governments to forswear the printing press? Retarded.

Step four: Auction all the financial assets previously nationalized—corporations, real estate, etc. There is certainly plenty of cash around to buy them with. Destroy the dollars received in the auction.

Why are we selling the assets we just bought? We bought them to close out a broken financial system, in which the relationship between asset prices and dollars was unstable and unhealthy. We are selling them to establish their free-market price in a stable, healthy financial system. We do not know what the right relationship between the number of dollars in the world and the net price of its financial assets should be. So we ask the market, and the market tells us.

Absurd. First of all, the market prices when the money supply is X are going to be very different from the prices after the money supply is like one-half X, or whatever it is after the government “Destroy[s] the dollars received in the auction.”

(Note: There are lots of kinds of “money” in a sophisticated financial system like the US’s, but I think I can make the important points without dwelling on that. Much.)

You see what he thinks he’s doing (and he’s explicit about it in passages I haven’t quoted): He’s trying to take all the asset values that are pyramided on a certain amount of base money and actually turn them into base money. Then sell the assets back to the private sector, destroy the money they paid for those assets, then lock in the remaining amount of base money forever.

He thinks this will “close out a broken financial system, in which the relationship between asset prices and dollars was unstable and unhealthy” and create a “stable, healthy financial system.”

This is unhinged. A simple illustration of why:

Suppose the government has printed 6 dollars (multiply this by $10 trillion if you like) and has decreed that for all time, the supply of dollars shall not be increased. (Let’s ignore the facts that (1) there’s no way for the current government to enforce this constraint on the future government, and (2) this is not how most money works– the vast majority of payments are not made in base money, which is what the government “controls,” but in other kinds of money that are supported by base money.) Now suppose that you honestly believe that the value of your house is three dollars and the value of your stock portfolio is four dollars. Someone says, “But dude, that’s a total of seven dollars, and there are only six dollars in circulation!” You shrug and say, “I’m not planning on selling all my stocks and my house today. I believe that if I did sell my house, I could get three dollars for it, and if I were to sell all my stocks, I could get four dollars for them. I understand that there are only six dollars in the economy, but since I’m not going to try to sell seven dollars worth of stuff, I don’t anticipate a problem.” And indeed, most of the time the economy is in exactly this position, and it does not, in fact, lead to any problems.

Occasionally there’s a sudden decrease in confidence about asset values and we have a market crash (in real estate, stocks, or whatever). What’s the solution?

There is none.

None that I can see, anyway. This, I believe, is just something we have to live with in a market economy. And if there is a solution, it sure as shit isn’t Moldbug’s.

He thinks, for some reason, that the total value of all assets in the economy should never exceed the amount of base money in circulation. He thinks that current asset values can exceed current base money only because everyone expects the US government to print more money in the future. He doesn’t get the private sector’s rational anticipations that most of the time, most of these assets won’t all be liquidated at once. And they’re never ALL liquidated at once. That has never happened and never will. Not to mention irrational exuberance that can send asset values into orbit for no particular reason.

(Analogy: It’s like insisting that the total supply of tacos should be enough to satisfy demand if everyone had a sudden craving for tacos at the same time. That rarely (with tacos actually never) happens, and insisting that Taco Bell maintain a large enough supply of tacos to meet such a theoretical demand is obviously absurd.)

Moldbug doesn’t get that there is no way to force the financial system to impose the aggregate constraint that (value of all assets) is less than or equal to (total amount of base money in circulation). There’s no way to even know that first quantity, the “correct” value of all assets! How are individual bond traders, or stock traders, or real estate speculators, going to price the assets they buy and sell to guarantee that the inequality always holds!? Take stocks. In order to guarantee that the total market value of all stocks plus the total market value of all other assets in the economy is no greater than 2 trillion dollars (a number Moldbug throws around several times), every individual stock portfolio manager would have to know the current asset value of literally every other asset in the economy! Then they could (in theory) refuse to buy or sell stocks for prices that would put (stock values + other assets’ values) greater than $2 trillion. It’s impossible for them to have such knowledge, of course.

And even if they had such knowledge, they’d have no reason to enforce the equality. And how could they? If the total amount of money in circulation is 2 trillion dollars, and if (value of all assets) is greater than (total amount of base money in circulation), who should take the hit? Are you going to deliberately sell your house for less than a buyer is willing to pay for it, just to help satisfy some abstract macroeconomic inequality? Or should some other home seller do so? This blatantly goes against people’s self-interest. Seriously, try to envision this: A buyer offers a house seller $200,000 for the house. The house seller says, “No, I think it’s only worth $150,000 and I won’t accept any more than that.” You see? This plan is not merely impractical; it’s completely unmoored from reality.

And what about honest differences of opinion? Back to that $6 vs. $7 example: What if I think houses are overvalued and stocks are correctly valued, and you think stocks are overvalued and houses are correctly valued? Which one of us gets to force the other to lower the price for which they’re willing to buy or sell an asset?

This is insane.

It’s insanity dreamed up by a hopeless dilettante. Moldbug should stick to something that he’s good at, if there is any such thing (writing software or whatever) and stay far, far away from areas outside his area of expertise. And unless and until he does that, people should stop giving any credence to him.

I Don’t Know How to “Solve” Banking, and I Doubt Anyone Does

Unless I’m wrong, and you know how to solve it, in which case let me know in the comments. I’m curious. Or get it published in an Economics journal, and get the Nobel prize.


Consider this scenario: Vinny the Loan Shark, whom you owe $50,000, came up to you at 9:00 this morning and said, “Gimmee my fifty back by 5:00 tonight or I’ll break both your legs.” Vinny is a very direct guy. Isn’t it great to get away from stuffy circumlocutions?

Fortunately, you own a house worth $100,000. No problem! You’ll just sell it by 5:00 this evening, and you’ll have enough money to pay Vinny back and then some. You and your legs will be fine. What’s that? You can’t liquidate your house that quickly? Oh dear, you do have a problem. I hope your health insurance is paid up.

Before you censure Vinny too harshly, grok this: When it comes to banking, you and I are Vinny.

See, we all want banks to offer checking accounts so we can use them to pay for stuff. Obviously this only works if you can spend the money in those accounts any time you want. So, from your point of view, the funds in that account are a zero-maturity asset. From the bank’s point of view, since they have to make payment whenever a check is cleared, those funds are a zero-maturity liability.

The problem, of course, is that most of the bank’s assets are in rather illiquid forms like 10-year loans they made to businesses, 30-year mortgage loans they made to families to buy houses, etc. They can’t liquidate all that instantly. So if a bunch of checking account owners – Vinnies – come up to them at once and say, “We all want our money back right now,” the bank can’t comply.

This is called a bank run and leads to that exciting scene in the movie It’s a Wonderful Life in which the bank where the hero works suffers a run and he has to deal with the emergency. It also leads to the same thing happening in real life, which is more exciting but less entertaining.

“OK,” you say, “just prohibit banks from holding very much of their assets in 10-year business loans, 30-year mortgage loans, etc.” Alas, that won’t work, because you and I demand that banks provide mortgage loans so we can buy houses. And businesses need loans for various purposes, etc.

So here’s the problem: You and I, the public, demand that banks borrow money from us with zero-maturity checking accounts and lend to us with 30-year mortgage loans. This is called “maturity mismatch,” for obvious reasons, and it’s not just an unfortunate accident that banks are set up this way. The public demands that they be set up this way. How are we supposed to square this circle?

I don’t know. So far, no one else knows, either.

Deposit insurance has greatly reduced the problem of bank runs, but as the crisis of 2007-2009 showed, we are far from Eden.

I once heard an economist say that he thinks the current system— riven though it is with occasional banking panics, waves of failures, etc.— may actually be the best that can be achieved! It was much worse in the bad old days. At the start of the Great Depression, there was a banking crisis that forced about 30% of the nation’s banks to shut their doors! Believe me, the regulators are very aware of the maturity mismatch problem. We’ve been tinkering away with banking policy in the last 80 years and seem to have improved things, but certainly haven’t achieved perfection.

So: If you know how to totally fix banking, send a quick email to Jerome Powell. He’ll appreciate it.

International Trade: Oh God, Not This Again

Aright, bitches, the free trade thing.

This is not one of my “issues,” and I incline toward free trade, but the people who create these so-called free-trade deals obviously aren’t setting up free trade, and many of these “elites” (we need a better word for power-mad idiots) have an end-goal of eliminating western populations. They love treaties that destroy jobs held by European-descended people.

But they have much more dangerous ways of working toward that goal, which is why trade is low on my list of priorities. But for those for whom it is a high priority, some advice about debate:

Don’t contest free traders on theory. That’s their strength. Contest them on the thing that actually matters: the practical realities.

Why not take them on in the arena of theory? Because comparative advantage theory is not speculation. Its core proposition is a theorem, like the Pythagorean Theorem. That is, its core conclusion is proven to follow from the premises. We can judge from the amount of chatter that economists devote to it that the core proposition of comparative advantage theory is this:

If two nations have different tradeoffs in production, then there exists the possibility of mutual gains from trade.

(“Tradeoffs in production” means the slope of the production possibilities frontier, which describes a nation’s tradeoffs of one good for another. Like, how many apples they must sacrifice to grow another orange.)

This is the proposition free-traders have in mind when they repeat their mating call, “Ricardo!”

A production possibilities curve, showing tradeoffs in production.

And how are these gains from trade to be realized? Answer: if two nations have different tradeoffs in production, then it can be proven that they can minimize their joint costs of production… IF they trade in the right way.

The right way is the cost-minimizing way, where “cost” means the cost in terms of other goods you must sacrifice. (E.g., if you switch land from growing apples to growing oranges.) Minimizing costs of output means more output. So produce and export goods of which you’re the low-cost producer. That’s trade according to comparative advantage.

You cannot dispute the if-then statements in bold without looking like a doofus to anyone who is knowledgeable.

So don’t dispute them. If someone tells you, “Here is a triangle that is NOT a right triangle, and the Pythagorean Theorem tells us that…” you should point out that the Pythagorean Theorem doesn’t apply if it’s not a right triangle. Don’t dispute the Pythagorean Theorem; you’ll look like an idiot. Dispute its relevance to the matter at hand.

If you want to argue against so-called free trade agreements, here are some points you can make:

1. Verifying what a county’s comparative advantage is, is empirically impossible as a practical matter. Note what the central theorem says and doesn’t say. It says that if countries have different tradeoffs, then there exist some mutually beneficial trading opportunities. It doesn’t say that we know what those opportunities are… let alone that we can guarantee that actual trade is according to those mutually beneficial possibilities.

2. So-called free trade agreements are never actually that. Many people have made this point. They’re managed trade agreements, in which governments tweak the interventions they do in international trade.

Even George F. Will, before he became a contemptible cuck, pointed out when NAFTA was passed that if it were really a free trade agreement it would only be a couple of sentences, not hundreds of pages.

3. The proposition that there exist mutually beneficial gains is a statement about the aggregates of a nation. The theory does not say that all groups within the nation benefit. It leaves open the possibility that one group benefits to the tune of 10 units while another group loses 8, for a total aggregate gain of 2. OK, but if you’re in the group that loses 8 it’s not clear why you would support such a move. This is actually not heterodox, apparently. I once read on some Econo-blog about a (peer-reviewed!) paper that concluded that one group could benefit and another lose, from moving to free trade. I can’t cite the paper(s) off the top of my head, but apparently this has been out there in the literature for years now.

4. The theory says nothing about who captures the gains from trade even on a nation-to-nation level. It could be, in principle, that one nation captures all the benefits from trade and leaves the other nation exactly as well off as it was before. Except that not really, because all the adjustment costs are real costs, and then you never get any benefit. Adjustment costs include e.g. having to move to a new state to get a new job. Ricardian comparative advantage theory totally ignores adjustment costs.

The same point applies if your nation gets a small benefit from adjusting its industries, but the benefit is smaller than the adjustment costs.

* * *

Of course there is a real case against government interventionism in trade. The real case against interventionism is that governments are no more knowledgeable or angelic here than they are in any other area of life. They are ignorant and corrupt assholes, and there’s no reason to let them tell us what we can buy or sell.

Above I pointed out that many of the people who create “free trade deals” hate western populations. Well, giving those same psychopaths power to limit the trade we can do would be even worse than the current situation. In the current pro-free-trade political environment, they at least have to pay some sort of lip service to reducing trade barriers, which has occasionally forced them to actually do such. If we tell them, “Go ahead and control who we can trade with,” they will do exactly that, with great joy and gusto, and it won’t be with our best interests at heart.

If these people ever get the unlimited power they crave, they’ll try to starve us to death, following Stalin’s Ukraine genocide. Part of that attempt will be outlawing food imports. They’re likely to try that anyway, if they think they can get away with it, but for fuck’s sake let’s not make it any easier for them.

But all this is a relatively long-term issue. In the current political situation, worrying about international trade is rearranging the deck furniture on the Titanic just after it got hulled by the iceberg. Right now we need to worry about emergencies like immigration and the lawless judiciary. Once we solve those problems, we’ll have all the time in the world to worry about trivia like trade policy.

Socialism: Why you can’t do that

When socialism was a rampaging idea in the twentieth century, part of the intellectual war was the socialist calculation debate. This debate made the point that a socialist central planner could never have enough information to plan the economy. The basic reason is that you need to know people’s desires to do that, and the only way to know their desires is to set them free and see what choices they make.

Additionally, the engineering tradeoffs in the economy are immensely complicated. E.g., how much steel should we devote to building apartment buildings, how much to car production, how much to computer production, etc.? Only a decentralized mechanism – markets – has a prayer of dealing with those tradeoffs in a sane manner. A market economy is a practical solution to the information problem because each small unit – each firm or individual person – only has to wrestle with their own small piece of the economy. They don’t have to plan the whole thing.

Furthermore, markets have a crucial feature: Feedback. Businesses are punished for bad decisions by making losses. A central planner, in a world without profit and loss, wouldn’t even know about his mistakes, let alone have any incentive to correct them.

Socialists, being socialists, got their asses thoroughly kicked in this debate, then declared victory. (Plus ca change…)

A while ago Slate Star Codex had a post reviewing a book, Red Plenty, in which these issues arose. In the comments the socialist calculation debate flared to life.

One commenter says of the planners’ problem compared to the market problem, “This fails a simple sanity check. I refuse to believe that [individual] humans are able to calculate those equations…”

This fails to get a large number of relevant points. To mention just two:

(1) To solve that planning problem, the planner would need information about people’s preferences, which is in the people’s heads, so the planner would have to read people’s minds. The people, in contrast, are not faced with the problem of reading their own minds.

(2) The individuals don’t have to solve the same problem the planner does. They have prices to do a large amount of the computational work for them. Market prices convey information; specifically, prices sum up the scarcity of something relative to the demand for it. Here’s economist Friedrich Hayek, in a famous passage (, paragraphing added for ease of reading):

Assume that somewhere in the world a new opportunity for the use of some raw material, say, tin, has arisen, or that one of the sources of supply of tin has been eliminated. It does not matter for our purpose-and it is very significant that it does not matter-which of these two causes has made tin more scarce [relative to the demand for it].

All that the users of tin need to know is that some of the tin they used to consume is now more profitably employed elsewhere and that, in consequence, they must economize tin. There is no need for the great majority of them even to know where the more urgent need has arisen, or in favor of what other needs they ought to husband the supply.

Hayek notes that if information is decentralized, and everyone just deals with their own small piece, the problem is manageable. He continues:

If only some of them know directly of the new demand, and switch resources over to it, and if the people who are aware of the new gap thus created in turn fill it from still other sources, the effect will rapidly spread throughout the whole economic system and influence not only all the uses of tin but also those of its substitutes and the substitutes of these substitutes… and so on; and all this without the great majority of those instrumental in bringing about these substitutions knowing anything at all about the original cause of these changes.

Tin’s price could have gone up due to a decrease in the supply… and a very large number of things could cause such a decrease. It also could have gone up due to an increase in demand… and a very large number of things could cause such an increase. The people making choices affected by that price don’t need to know why it went up— it is a summary statistic that only conveys what they need to know— but the planner does have to know. To plan efficiently, the planner has to know whether tin’s price rose due to an increase in demand for it, and what and where that specific demand was… or due to a decrease in supply, and what the particular decrease was. Otherwise the planning problem can’t be solved. E.g., maybe someone has discovered a new industrial use for tin, a new technological development. The planner, in contrast to market participants, must know this to come up with a new optimal plan – the planner can’t optimize without even knowing the engineering tradeoffs in the economy!

Now the “sanity check” radar of the commenter mentioned above may be pinging. “Why,” he might ask, “does the planner need to know something the market participants don’t need to know? Why can’t the planner just replicate whatever info-processing mechanism makes this work in a market economy?”

Answer: Because the mechanism that makes it work is decentralization.

Memo to socialists: You can’t have a goal of central planning, then whine because your goal involves centralization.

(Socialists in the 20th century often said the planners could use prices. This assumes an answer to the question that is being debated. Where do the prices come from? Who sets them? What gives them any connection to real-world supply and demand?)

Alternatively, you could embrace decentralization – and I hope you do – but then you’re basically just replicating the market. (In the context of a basically market economy, conventional deviations from pure market, like taxes and welfare programs, are of second-order importance compared to the complete informational chaos that would attend an attempt at central planning.)

This is what the commenter meant, though he didn’t know it, when he wrote,

“What really happens is that those humans don’t really calculate all those equations, but use some simplified version. But then, why does the computer need to use the 1,001,000 equations instead of using similar simplifications, or approximations, or better algorithms…”

The simplifying trick those humans use is decentralization.

This is, indeed, the dilemma upon which all socialist notions must founder: Either you depart radically from the market, in which case you can’t solve the information problem and all is chaos, or you simply replicate the market outcome, in which case why bother?

One more point: If you’re trying to enlist me in your violent revolution that’s going to kill tens of millions of people to replace the market, you’ll have to provide an argument a lot more concrete than, “There must be some way to do it.”