Obvious that the end of the $8,000 first time home buyer credit caused a spike that has been more than reversed, much like November.

The question is how much that pull back, along with the euro and China issues, will slow what has been a moderately growing US economy.

With demand leakages like pension fund contributions and income compounding in pension funds and other corporate reserves, aggregate demand can only be sustained by the private sector or the public sector spending more than its income.

And right now the drivers of private sector debt- housing and cars- don’t show signs of the increases necessary to close our output gap.

That leaves the public sector.

For the current size of govt, we remain grossly over taxed by a govt that thinks its run out of money and is now dependent on the confidence of investors to fund itself.

Note, for example, the expired unemployment benefits mean a reduction in aggregate demand which in fact works against employment.

And this is with a Democratic majority.

As long as the ‘deadly innocent fraud’ that to be able to spend dollars the US Govt needs to tax or borrow is taken as a given, it seems unlikely that pro growth policy will be implemented and unlikely growth will be sufficient to materially close the output gap any time soon.

5 Responses

  1. “And this is with a Democratic majority.”

    Just wait till after the elections.

    The Not So Great Depression

  2. I am disappointed that anybody still thinks it matters what party is in the majority, the only thing that matters in DC in money.

    Warren is totally right in my opinion, my question is how much longer can we go on with the overreach in every direction, war, peak oil, destruction of the planet…ect

  3. Of course Warren is right. But then again, so was Benjamin Franklin (per an essay published by the Philadelphia Fed).

    But what gives paper money its value? Here Franklin is clear throughout his career:
    It is not legal tender laws or fixed exchange rates between paper money and gold and silver coins but the quantity of paper money relative to the volume of internal trade within the colony that governs the value of paper money. An excess of paper money relative to the volume of internal trade causes it to lose value (depreciate)…. paying paper money back into the government would reduce the quantity of paper money in circulation and so return paper money’s value to its former level.

    http://www.philadelphiafed.org/publications/economic-education/ben-franklin-and-paper-money-economy.pdf

    We just read the other day that the M3 money supply is falling. Tsy should be spending money into creation to boost aggregate demand in support of the volume of internal trade (what the kids call “GDP”). If the economy moves towards maximum employment, Congress can always come back later to tax more money “back into the government” to deal with any inflationary pressure.

  4. What do time banks say about the nature of money? Here you have a barter-based mini-monetary-system with no taxes that seems to be working. A key question: Where/how does the initial “time” money get put into the system?

    1. Time banks may work when there is a high degree of trust among participants, at some point the group will become too large and the lack of trust will inflate away the value of the time dollars. This business about not putting a dollar value on a “time dollar” to thwart the IRS is just dumb. The Service could easily set a market rate (if nothing else, the minimum wage) and tax based on that.
      http://en.wikipedia.org/wiki/Time_Banking

      Of course, its not real banking, there’s no reserve to fraction. :o)

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