October 21, 2016 § 23 Comments
A fiat dollar is a security issued by the sovereign. Like every other financial security issued by an institution, fiat dollars grant the owner of the security an economic claim backed by the institution’s balance sheet. Like every other financial security issued by an institution, it is possible to trade fiat dollars for other property in the marketplace. It is also possible to exercise the specific rights granted by the security instead of trading it: in the case of fiat dollars, to turn it in to the sovereign who issued it for the satisfaction of a particular tax obligation.
The worth of a fiat dollar derives from the financial rights that it grants. Its price in marketplace exchanges represents what other people are willing to pay, in terms of different kinds of property, in exchange for the financial rights granted by the fiat dollar.
A ‘gold standard’ dollar is the same kind of thing. It is a financial claim against the balance sheet of the sovereign; the financial rights conferred are the satisfaction of debts owed to the sovereign, in particular tax liabilities. The difference is that the gold standard irrationally presupposes that a substantial portion of the sovereign balance sheet must or should be made up of gold — an otherwise not very noteworthy kind of property, property which while fairly durable sits unproductively in a vault where it destroys economic value in the demands that it places on its defense and maintenance against the universal tide of entropy.
Advocacy of gold standard dollars is like advocacy of gold standard capital stock: in essence, it requires than any securities which an institution issues must be printed on gold or must come along with some ratio of gold stored away in addition to the rights granted by the security. Advocacy of gold standard dollars assumes that gold is the only valid kind of wealth, when in fact almost all of the wealth in the world is constituted by property other than gold. A gold standard involves making a wildly irrational assumption about sovereign finance that we would never make about private finance. It is as if the stock price of corporations were required to be indexed to the amount of gold that the corporation has stored away in a vault, even though the gold is entirely useless in the company’s business operations and its storage and provision for security constitute a senseless and perpetual drain of resources.
Gold standard dollars are no more rational than requiring by statute that eggs be sold in golden egg cartons, or bundled with certificates entitling the bearer to a gram of gold per egg. Gold standards are literally crazy, a scrambling together of entirely unlike property into a toxic mix. Folks who simply hate government per se advocate for them precisely because they understand on some level that the gold standard is irrational, debilitating poison. If you can’t drown the balance sheet of the government you hate by weighing it down with lead, at least maybe you can weigh it down with gold.
But you won’t see them – at least not the more rational ones – advocate for a ‘gold standard’ in the securities that make up their retirement portfolios, or in the goods they buy in the grocery store. An investor with an equity portfolio doesn’t want to require the companies whose stock he owns to carry large quantities of inert and unproductive gold on their balance sheets. For these folks, the gold standard is an unprincipled exception intended to apply only to government precisely because it is financial poison for the institution which they despise.
The crazier wing of the gold standard crowd isn’t even sophisticated enough to grasp that a gold standard is financial poison. They like the gold standard because GOLD. Their attachment is pure unreasoning emotion. A gold standard is, objectively, a requirement to literally add useless dead weight to unrelated kinds of property.
But better to let the scrambled eggs rot than to give up our irrational attachment to gold.
 Absent contractual terms or other legal restrictions to the contrary.
 T-bills are just fiat dollars once removed, as stock options are just shares of capital stock once removed: they are not debt, and the sooner you banish the idea that they are debt from your mind the better you will understand them.
October 20, 2016 § 23 Comments
In retrospect I suppose it is odd that this hasn’t come up before; but it isn’t the sort of angle I’d thought to raise myself. That’s just not how my mind works.
In the comments below MarcusD writes:
A priest in my diocese, when the subject of usury comes up (well, all two times), states that opposition to usury is “inextricably linked with antisemitism.” Do you have any thoughts on that position? Will you add a rebuttal to that to the “Usury FAQ”?
My first thought was that the assertions of this priest are just obviously ridiculous, the sort of modern guilt-by-association lunacy unworthy of the validation involved in treating it as a serious objection. (To be clear: it is certainly not a serious objection).
Several things may be noteworthy though, at least in terms of characterizing the association and the guilt — to the best of my knowledge, and with all the usual caveats, this being well outside the domain of what I consider substantively pertinent to the basic moral question.
First, the fact that diaspora Jews in Christian lands gravitated toward usury as a profession is as much Christians’ fault as Jews’ fault. The attitude was that Jews were heathens and were going to Hell anyway, so the Christian sovereign’s law actually treated Jews more leniently than it treated Christians. Christians were prohibited from engaging in usury for the sake of their own souls; but Jews were damned anyway so why not let them do what they want? A libertine approach to the laws that applied to Jews was really a form of cruelty toward them, as is true of libertine legalism in general. It was also a good way to cultivate anti-Christian forces within Christian society over the long term.
Just imagine if there were a tribe in modern America who were treated as if the law against violent crime didn’t apply to them. Wouldn’t that in objective fact be cruelty toward that tribe? Wouldn’t we expect the violent behavior of that tribe to increase, to their own detriment and ours?
Second, the situation illustrates the lie built into ‘libertine’ law in the first place. Without the Christian sovereign’s enforcement, usurious contracts would have no teeth. To the extent that the Christian sovereign enforced usurious contracts he formally cooperated with them: you can’t enforce contract terms without intending them. So professional usury on the part of Jews was really a partnership between Jews and their Christian enforcers.
Third, there were in fact significant non-Jewish tribes or dynasties associated with professional usury, notably the Lombards. As is the case in many high IQ professions Jews were doubtless overrepresented in part simply because they have greater intelligence than most of the rest of the bell curve. But it isn’t as if they had a monopoly on the particular sin in question.
Of course it is risible in the first place to claim that the Church’s doctrinal condemnation of usury depends on whether or not one tribe or other has become, fairly or unfairly, disproportionately associated with that sin. Alcohol abuse doesn’t become immune to criticism in virtue of its (fair or unfair) association with the Irish.
But in any case with usury, as with any basic execrable disgusting filthy sin against nature and nature’s God, there is plenty of guilt to go around.
October 19, 2016 § 1 Comment
October 19, 2016 § 60 Comments
The financial state of any institution is defined, as a matter of knowledge, by its balance sheet. An institution obviously has an objective financial state in reality whether or not there is a balance sheet. But without a balance sheet or its equivalent, the financial state of an institution is not known.
There is no balance sheet for the United States government: it does not exist and has never existed.
Furthermore, there is not even a coherent conceptual framework from which to define a balance sheet for the USG, let alone collect the data, let alone produce the actual report.
Therefore, confident statements about the financial state of USG are expressions of the speaker’s feelings, not statements of known or even knowable fact.
Providing historical examples of sovereign financial crises and financial prosperity does not address this point: it conflates epistemology with ontology, understanding of reality with reality itself.
 Understanding how this is changing and why is also crucial, of course.
October 18, 2016 § 14 Comments
Most not-financially-literate people think that sound financial management is about cash flow. This is wrong, even badly so, but it is at least somewhat workable for a household to a first approximation: as long as you keep bringing in more cash than you spend, the wheels stay on.
Institutions are nothing like that. (Even households aren’t really like that, but it kinda sorta works to a first approximation). What is more, what looks like cash flow for an institution like the United States Government, isn’t. So everything you think you know about USG finance is wrong: an illusion created by a superficial, outright false analogy.
In layman’s terms, a balance sheet is an inventory of all of the property that an institution controls and all of the various financial claims against that property. It is impossible to know the financial health of an institution, including whether things are getting better or worse financially, without understanding (under whatever labels) the institution’s balance sheet and the trajectory of its balance sheet; that is, the changes happening to its balance sheet.
In traditional accounting these are reported as balance sheet (at a point in time), profit and loss (over some interval), and cash flow (over the same interval). The first is a fundamental snapshot of the financial state of the institution; the latter two tell us specifically how the institution is changing financially.
Balance sheet is fundamental. It provides the current financial state of the institution at a particular point in time. The other two reports tell us what financial changes happened to the institution over the reporting period.
Profit and loss measures (roughly speaking) the gain or loss in ‘equity’, that is, it answers the question (in great detail) “what has happened to the value of all of the property on the balance sheet, minus the satisfaction of all of the remaining financial obligations against that property?”
Cash flow measures the flow of liquid property (“cash and equivalents”): property which can be easily and quickly traded for something else. Cash flow is of secondary importance: you have to keep an eye on it to make sure you keep enough liquid property on hand to pay your bills on time, but in general liquid property is not as productive as other capital so it is best to keep it to a manageable minimum.
People think that USG revenues, expenditures, and deficit numbers give meaningful insight into cash flow. And many believe that the ‘national debt’ provides meaningful insight into the health of the (nonexistent) USG balance sheet.
They don’t. Intake and outflow of fiat dollars does not constitute cash flow or an approximation of it, and the balance sheet and P&L are a complete black hole.
The reason fiat dollar flow doesn’t constitute a USG equivalent for cash flow — as I have explained many times now — is that we can’t measure the change in balance sheet liquidity of an institution using securities issued by that very institution as a metric. Measuring Google ‘stock flow’ is not meaningful information, in itself, about changes in the health of Google’s balance sheet. And in the case of USG we don’t even know what kinds of things we ought to be using to measure, or what specifically we ought to measure, etc.
That is, we cannot answer the question “what is happening to the liquidity of USG’s balance sheet?” — BECAUSE WE DON’T HAVE A BALANCE SHEET.
We also cannot answer the question ‘what is happening to retained earnings’, or a thousand other pertinent questions.
What we actually have in terms of real information is no balance sheet, no P&L, no cash flow, and some back-and-forth in the institution’s own securities which create the illusion of something kinda sorta similar looking to cash flow as long as you don’t pay attention.
And the biggest danger here is not the things we don’t know. As some wag said, the biggest danger here is the things we know that aren’t true.
October 18, 2016 § 33 Comments
Everything you think you understand about government finance is wrong. (You aren’t alone: everything that everyone thinks they understand about government finance is wrong. There is literally no way to accurately understand government finance: the accounting framework to do so does not even exist conceptually).
The ‘national debt’ isn’t debt. Debt is when an institution owes some property (actual property or third party securities) to a creditor. (Institutional ‘owing’ isn’t like personal debt: it is an impairment of the balance sheet of the institution).
USG owing dollars to China is like a company owing shares of its own stock to China. T-bills are more like stock options than notes payable: they represent a claim for the future issuance of USG securities, not a claim against actual property or third party securities.
Dollars are securities which impair the balance sheet of USG. But nobody knows what the balance sheet of USG ought to look like, not even in theory as a conceptual matter, let alone what it actually does look like as populated with sound real world data.
That doesn’t mean ‘everything is fine, go back to sleep’. What it means is that neither the folks who say that everything is fine nor the folks who think we are on the brink of apocalypse can possibly know what they are talking about.
They are just expressing their feelings.
October 17, 2016 § 13 Comments
Catholic usury apologists find themselves in a bind, locked in a box of cognitive dissidence.
If any moral doctrine of the Church is simple and infallible, it is the condemnation of usury. Moral doctrine on sexuality is actually more complex and nuanced than moral doctrine on property; moral doctrine on contraception more casuistically tricky than moral doctrine on usury (though still not nearly as difficult as self-serving cognitive dissidence proposes).
Catholic usury apologists fall into two camps.
One camp just asserts that doctrine is de-facto infinitely plastic, which means it can be molded into a shape that permits whatever perversions they want it to permit. Bread of Life and circuses for everyone!
The other camp asserts that doctrine never changes but that circumstances have changed enough so that – in the current year – black is white, up is down, and water is dry.
The cognitive dissidence is obvious once you step away from the hothouse, and has many tells. One of those tells involves the simultaneous assertion that back in the bad old days nobody knew anything about the subject and that back in the bad old days everyone who was smart agreed with us.
So we’ll get simultaneous assertions that the nature of money has changed (as if that were even relevant), that simple mutuum (personally guaranteed) loans are no longer trivially distinguishable from other contracts, and that modern banking and commerce is a whole new kind of thing unlike anything that came before. At the same time we’ll be treated to references of saints and popes whose families were bankers along with citations of Jesus chiding a servant for failing to make an interest-bearing bank deposit in the New Testament.
I keep waiting for their heads to explode. But I am always impressed by the ability of human beings to cling to manifestly incoherent nonsense when it means they can have whatever kind of sex they want to have, with whomever or whatever they like.