The financial nanny state

October 1, 2016 § 20 Comments

Some folks seem to think that in suggesting that people are responsible for preserving their own property, from which it follows that they should not put their life savings into property they don’t personally understand (and instead should put their savings into property that they do personally understand), I am demonstrating a lack of empathy.

A different view though is that – unlike the modern financial nanny state – I am treating my readers like adults capable of making their own choices about what property to own, and living with the consequences of those choices.

If you don’t like monetary inflation – the fact that the number of fiat dollars which trades for a loaf of bread changes gradually over time – then by all means buy something other than bank deposits to serve as your life savings.

What you will find is that prices – the relative trading ratios of different goods and services – are not static.  And you will find that ethically preserving your property requires work, expense, and risk.

Now maybe your nanny didn’t tell you this.

But I’m not your nanny.

§ 20 Responses to The financial nanny state

  • Kevin Nowell says:

    Good stuff Zippy.

    The idea that people are not capable of making wise decisions with their money may be true in some instances, the fool and his money are quickly departed, but that just adds more fuel to the case against liberalism. Society cannot protect the fool from every foolish decision he can make. That is why we need authority that is local, personal and paternal.

  • Zippy says:

    Kevin Nowell:

    To add to your comment, it is certainly true that some people lack the capacity to look after their own property — some to enough of a degree that they probably need a family member or other custodian to do it for them.

    But treating zero movement in the trading ratio (price) between fiat dollars and some product (e.g. bread) as a primary fiduciary duty of the sovereign isn’t going to help those people.

  • Zippy says:

    Another confounding factor here is that often the kind of property that a particular person understands doesn’t provide as strong of an investment return as property that he doesn’t understand. Sometimes gaining an understanding requires a lot of work that he isn’t willing to put in. Other times grasping the nature of what is going on is simply beyond his financial or domain talents.

    This leads many folks to make all sorts of investments that they don’t understand, and then to break out the pitchforks and torches whenever it doesn’t go well. They are angry either way: either they didn’t get theirs, or they got cheated by hucksters (which of course does sometimes happen — especially when people buy property they don’t understand).

  • Josh says:

    to be fair, every April the government demands that I turn over a bunch of fiat dollars or bank deposits to them. If everyone asks their boss to be paid in banana bread, and puts their saving in banana bread, their would be a massive selll off in April reducing their exchange rate.

    Your general point is fine (though it does seem to lack empathy for the common man, who doesn’t really even have a life savings), but at the same time, wouldn’t it be nice if monetary policy was made with a view toward promoting the kind of stable family life that allows community and virtue generally to flourish.

  • Zippy says:

    If the common man doesn’t have a life savings then inflation is mostly irrelevant to him. He has no long term property denominated in dollars, and his wages are under constant renegotiation pressure anyway.

    (I know this not just abstractly but from first hand experience).

  • Purple Tortoise says:

    Zippy,

    Let me see if I can put forward your argument in my own terms.

    The government requires people pay taxes in the form of certain pieces of paper, which I will call “tax certificates”. Because these pieces of paper are what people need to pay taxes, they have value, people trade them, and they are conventionally called “money”. The government gives out tax certificates in return for goods and services, and takes them back as required taxes. If the government gives out more than it takes in, the number of tax certificates in circulation will increase and will become easier to obtain for the purpose of paying taxes. Thus, their value will decline relative to other goods. Anyone holding extra tax certificates will see their purchasing power decline, but why should the government be obligated to maintain tax certificates as a non-declining store of wealth? After all, gold can be a store of wealth, but if new large sources of gold are discovered, the purchasing power of gold will also decline. If someone wants to try to keep his wealth from declining, then let him trade his tax certificates for some other assets, though bearing the risk that those assets may also decline in value.

    I suppose this is an appropriately abstract response to the abstract assertion that government ought to maintain the purchasing power of fiat currency, but my concern is not that government inflates the currency, but rather that government actively takes steps to prevent people from avoiding consequences of monetary inflation when it occurs. For example, governments (China now and the U.S. in the past) will pass laws capping the interest rate banks can offer on savings accounts such that it is below the rate of inflation (this is called financial repression). Governments will also outlaw the use of alternative currencies (e.g., it was illegal for people to own gold in the U.S. for several decades) at times when people would rather not hold onto “tax certificates” due to substantial inflation. Sure, there are always ways to work around such laws, but transaction costs can be high and those with less wealth are disproportionately hurt.

    Another issue is when the government issues tax certificates not to purchase goods and services needed by the government but instead to affect the value of other types of assets. Most of the stock market gains over the past decade have occurred on days of Federal Reserve meetings, indicating that current stock valuations are politically rather than economically determined. Almost all mortgages for private home purchases are provided by the government rather than the private sector, indicating again political rather economic determination. The super wealthy and politically connected can do fine in such an environment, but it is more difficult for the average person to figure out how to buy low and sell high when low and high are so dependent on government decisions.

    My impression is that people are not so much desiring a nanny state but rather wanting the government to stop issuing extra “tax certificates” in an attempt to control asset values and “manage” the economy.

  • Zippy says:

    Purple Tortoise:

    Because these pieces of paper are what people need to pay taxes, they have value, people trade them, and they are conventionally called “money”.

    With the caveat that most of what people call ‘money’ are not these actual certificates, but are bank deposits and the like. (In general the way modern economists define ‘money’ is simply incoherent, because it rests on anti-realist assumptions tied to usury and other literally unreal ‘property’).

    If the government gives out more than it takes in, the number of tax certificates in circulation will increase and will become easier to obtain for the purpose of paying taxes. Thus, their value will decline relative to other goods.

    That reductive model doesn’t reflect reality. Issuing more securities does not, in general, degrade the value of existing securities. If it did then when Google issues more stock the stock price would always decline.

    Your unstated assumption, in other words, is that sovereign spending (issuance of currency) has no financial effect on sovereign marketplaces. I have no idea (and nobody has any idea) what the balance sheet equivalent for the sovereign ought to look like in concrete, but clearly it rests ultimately on whatever property the sovereign directly controls — including sovereign marketplaces.

    government actively takes steps to prevent people from avoiding consequences of monetary inflation when it occurs

    The consequences of monetary inflation on dollar denominated assets, sure. That is hardly the only kind of property which exists though.

    Finally, objecting to political influence on the economy is like objecting to a mall owner’s influence on the mall.

  • Purple Tortoise says:

    Thanks for your response, but I think you misconstrue my points. Google can issue some stock without a price decline, but beyond some point continued issuance will result in a price decline. The same goes for government issuance of currency, but in that case, unlike Google stock, the government makes it difficult to opt out the currency.

    And in terms of political influence on the economy, I am arguing that there is a qualitative difference between an economy where the best way to make money is to create something of real value and an economy where the best way to make money is to figure out which way the government subsidies will be going and get there first. Who wants lease a store in a mall where profits are primarily driven by subsidies the mall owner gives to certain proprietors that are extended or withdrawn according to political whims?

  • Zippy says:

    Purple Tortoise:

    Google can issue some stock without a price decline, but beyond some point continued issuance will result in a price decline.

    And again, that is simply incorrect. It depends upon what the newly issued shares are exchanged for. You have to grasp this point in order to grasp what is happening.

    Furthermore, it is often the case that failure to issue new shares (spend on something in particular) will damage the balance sheet and ultimately make the share value go down.

    Suppose you buy something with cash. What has happened to your net worth — to your personal balance sheet?

    If you said ‘it goes down’ then you have made a mistake. It might go down, if you spent the cash on a consumable item and consumed it. It might stay the same, if you bought a house or some fixed property. And it might begin going up, if you bought a productive investment.

    So the notion that issuing new securities and spending them dilutes the value of that kind of security — lowers the property base of the balance sheet which is impaired by those securities – is simply false.

  • Laura says:

    Zippy,

    I’ve been lurking on your blog for a little while, and don’t quite get these posts where you say that a sense of entitlement leads people to say “what about inflation? What about opportunity costs?” Surely it’s not a personal defect that causes these questions, but rather every that every economics class or finance self help book from the last hundred years puts a huge effort into drilling these questions into people’s heads. Of course lots of people are going to be very surprised when you say these concepts are not important.

    If I understand you correctly, you are not disagreeing that inflation and opportunity costs are important factors in figuring out whether a loan would be a good business deal. You’re saying that the only morally acceptable interest rate on a personal loan is zero, and if that doesn’t make good business sense, then don’t do the deal. You’re not suggesting that people should continue to do their current deals, just with an interest rate of zero because inflation and opportunity costs are irrelevant to business as well as morals?

  • Purple Tortoise says:

    Yes, I see your point about non-dilution of Google stock. It doesn’t matter how much is issued as long as it is exchanged for something productive.

    But it is not clear to me how Google stock is the right analogy for government-issued currency. Possession of a dollar gives me no share in ownership of government assets. All that I am promised is that I can use the dollar to pay taxes owed to the government.

  • Zippy says:

    Purple Tortoise:

    But it is not clear to me how Google stock is the right analogy for government-issued currency.

    As an analogy it did its job, which was getting you to this point.

    Possession of a dollar gives me no share in ownership of government assets. All that I am promised is that I can use the dollar to pay taxes owed to the government.

    Sure. The capital stock analogy gets your head around the fact that dollars are a security issued by the sovereign with all that that implies, but dollars obviously entitle the bearer to a different structure of claims versus capital stock.

    Suppose a company issues coupons of some sort, which it honors.

    Suppose people trade in those coupons because they have value.

    To what extent is it a terrible injustice against coupon holders or bakers of bread when the number of coupons which trade for a loaf of bread goes up or down? That is, to what extent are coupon holders entitled to a constant trading ratio between coupons and bread?

    UPDATE:
    The answer to the rhetorical question is “not at all”. Once you see that you have grasped the situation correctly.

  • Zippy says:

    Laura:

    Of course lots of people are going to be very surprised when you say these concepts are not important.

    Not that the concepts are unimportant, but that the entitlements asserted are insane.

    Folks are often unaware of the entitlements they are asserting, and yes, much of it is the result of indoctrination. That is fine, actually — unless those entitlements are insane.

    You’re saying that the only morally acceptable interest rate on a personal loan is zero, and if that doesn’t make good business sense, then don’t do the deal.

    When it comes to usury specifically, I am saying that a mutuum loan (any loan secured by a personal guarantee) is best considered a gift. It should only be done out of friendship or charity, never in pursuit of profit.

    Sometimes we do business with friends, or mix business with charity, and that is OK. Real life is like that (but be careful).

    Mutuum loans specifically are only ever morally licit as acts of charity/friendship, and any contractual interest on such loans is usury.

  • Purple Tortoise says:

    Thanks, Zippy.

    I was not arguing it is an injustice that the trading ratio between coupons on bread goes up and down; I was arguing that it is an injustice that the coupon issuer tries to prevent holders from using different coupons when the issuer’s coupon-bread ratio is trending unfavorably.

  • Zippy says:

    Purple Tortoise:

    I was arguing that it is an injustice that the coupon issuer tries to prevent holders from using different coupons when the issuer’s coupon-bread ratio is trending unfavorably.

    And I have pointed out that, since the coupons are only needed instantaneously to perform specific transactions and are not needed as a long term store of value, this ‘prevention’ is really a self-inflicted state of the coupon holders (at least in the absence of hyperinflation/hyperdeflation).

    If it is trivial to purchase and own property the value of which is not linked to the trading ratios of the coupons and other property — and it certainly is — then how can pretty much anything that doesn’t change the actual entitlements attached to the coupon be an injustice?

    Whether or not you want to use those coupons as long-term storage of economic value is entirely up to you. If the coupons don’t work out the way you hope as long term value storage, that is entirely your own doing — a consequence of your free choices in the presence of an embarrassing variety of alternatives.

  • Zippy says:

    Said differently:

    If you have no need for long term storage of economic value and have no debt, inflation is irrelevant to you. Money for you is just a means for making transactions in near real time.

    If you are in debt, inflation helps you because your property and labor become more valuable in comparison to your dollar-fixed debt over time. In this sense inflation is a kind of welfare for the working poor.

    If you think gold is better long term storage of value than dollars, buy gold or securities which entitle you to gold (after you’ve done the work to understand them).

    If you think real estate is better long term storage of value than dollars, pay down your mortgage and/or buy more real estate.

    If you think a farm is better long term storage of value than dollars, buy or invest in a farm.

    If you think productive companies are better long term storage of value than dollars but don’t know what companies are better than others, buy VTI. [Disclosure: I own a substantial amount].

    If you think the Standard and Poor companies are better long term storage of value than dollars, buy Spiders.

    If you think owning a piece of Harley Davidson is better long term storage of value than dollars, buy Harley Davidson stock. [Disclosure: I probably own a little in various funds or managed accounts. And I own one of their motorcycles].

    In no case should you expect, nor are you entitled, to even preserve the purchasing power of your property against the forces of entropy without expense, work, and risk on your part.

    In no case does making a mutuum loan entitle you to any interest whatsoever.

  • Purple Tortoise says:

    Zippy,

    I have no disagreement with what you say above. I’m not arguing that the government ought to maintain currency as a store of value. What I am arguing is that when inflation of a government’s currency gets painful such that people will really not want to hold onto that currency, the government will take steps to make it difficult/illegal to transact in gold/another nation’s currency/etc. Sure, you can still transact in motorcycle stocks (or motorcycles), but that is inconvenient and transaction costs will be high and not easily borne by people with less wealth.

  • TomD says:

    A random thought – violations of the natural law, should cause reactions from nature itself as the nature of things as they are revolts against the violation.

    So by this, I see inflation as the natural law’s reaction to the unnatural evil of usury. An example shows this – inflation helps debtors (usually poor people) – I have a mortgage for $200k – and therefore inflation is good to me, as I can pay off my debt in futuredollars that are easier for me to get (who here wouldn’t want a 1970s loan payment on a house in 2016 dollars?). Inflation hurts people with “dollar equity” (usurers) – which is produced by usury (as inflation doesn’t affect “real equity,” an apple is an apple no matter how many dollars it is “worth”) and helps people with “dollar debt.” Deflation helps people with dollar equity and harms those with dollar debt – and doesn’t affect real equity.

    Therefore it is impossible (and inherently unjust) to try to eliminate inflation without eliminating usury, and all attempts to do so will exacerbate the problem.

  • Zippy says:

    TomD:
    I really like the term “dollar equity”: it more pithily captures what I have been calling “dollar denominated assets”.

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