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Consequences of Money reform II

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Winston957
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Post: #21
RE: Consequences of Money reform II

In my state Riesland I put to much money in military and was forced to introduce Money Reform II.

http://de.ars-regendi.com/staat/savehaus.../show.html

OK, interest rates skyrocked, but I could lower them within a few years. What remained was I high saving ratio, that peaked at 23% and remained there for years. Consequently consumption remained a relatively small part of my GDP. Exactly that part was missing compared with other states. Saving ratio sank now to around 16% which I had the feeling was the result of drastic cuts in my pension budget, but still it's high.

I can say that MR II saved my state and in the end it was quite successful with a low inflation and an average growth equal or the same high than other states in this world. Given that my state suffered from quite a few nuclear bombs, I think it's a success.

Winston

14.12.2014 11:34
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Helsworth
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Post: #22
RE: Consequences of Money reform II

Winston957 Wrote:
In my state Riesland I put to much money in military and was forced to introduce Money Reform II.

http://de.ars-regendi.com/staat/savehaus.../show.html

OK, interest rates skyrocked, but I could lower them within a few years. What remained was I high saving ratio, that peaked at 23% and remained there for years. Consequently consumption remained a relatively small part of my GDP. Exactly that part was missing compared with other states. Saving ratio sank now to around 16% which I had the feeling was the result of drastic cuts in my pension budget, but still it's high.

I can say that MR II saved my state and in the end it was quite successful with a low inflation and an average growth equal or the same high than other states in this world. Given that my state suffered from quite a few nuclear bombs, I think it's a success.

Winston

Boy, your exports are the same as your domestic consumption. I find that very strange... Anyway, MR2 (in real life) would mean the dissolution of all private sector savings accumulated during the course of time that the government ran deficits. Pension funds would collapse. Private sector savings desire would explode, and the propensity to consume would fall drastically. As for the interest rate skyrocketing - this shouldn't happen at all. Because it's still the regent's own currency. And there's no legitimate reason for why it shouldn't remain as it was before the regent implemented the reform. The interest rate is part of monetary policy. Fiscal deficit funds can take either of 3 forms: reserve balances at the CB, savings accounts at the CB (government securities), or cash. So if the CB would want a 0 rate, it wouldn't swap bank reserves with interest bearing securities. That's all issuing public debt is, a procedure to drain excess bank reserves from the system in exchange for treasuries - upon which the banks earn more interest than they do on bank reserves. So in lack of selling treasuries, the interest rate will fall to the bottom of the corridor, provided that the CB paid no interest on bank reserves; usually it's 0,25%.


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This post was last modified: 14.12.2014 12:03 by Helsworth.

14.12.2014 11:57
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Winston957
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Post: #23
RE: Consequences of Money reform II

Strange, yes, and not very realistic at, least not on the long run. I thing long term negative effects of MR II are overdone in this game. Why should the saving rate be so high for so long. Even if savings are (almost) wiped out it doesn't necessarily mean everybody starts to save like mad for 30 Years. MR II can have positive effects, too, it depends on the situation and the way MR II is implemented

Yes savings are of course wiped out, too. That's the necessary consequence. But in Ars regendi consequences seem too be limited to the public debt and that is not was money reforms in real life usually are (in Germany we had 3 in the last century and none of them was constrained to the public debt). A main (or maybe even the main effect, depending on the situation) effect of a REAL money reform in real life would be wiping out the private debt/savings between private subjects.

I think at the moment the economy in the real world is suffering from too much debt, public also private debt so a MR II reform might even do some good. What's the real worth of nominal savings held in a currency, if the debtor is not able to pay the interest on it? CB's hold the interest rate artificially low and therefore avoid bankcrupcy of such debtors. This leads to a "wrong" allocation of capital and sort of "freezes" the economy, because a lot of unhealthy debtors (states, company's and private persons) a artificially "kept alive" in financial terms.

A lot would depend on how the exchange rate between old and new currency is determinded with respect to stock ob debt and recurring payments like rent for housing, salary etc. I am quite pessimistic, that we will have the opportunity to witness that in the relatively near future, since I think QE won't work.

Be it as it may, it brings me back to the game an its strange concept of money supply in, which ignores private IOU's and of course it ignores (like mainstream economics) the absolute level of debt in an economy.

Winston

14.12.2014 12:41
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Post: #24
RE: Consequences of Money reform II

MR2 deals with just the government debt. I would imagine that private debts are simply recalculated in the new currency - so private debt levels don't get affected by the reform. I've never seen a case in which a country had too much sovereign debt denominated in its own currency.

Pension funds (public or private) that rely on government securities are wiped out. Any other source of funding for pension funds is ponzi - meaning, you need to get money from someone else in order to honor the pensions. Usually this means laying off some people. Someone's income is another's payment. These things balance themselves to 0 in the private sector. So the only way we can keep people employed and honor pensions as well is for the government (non-household) sector to conduct the proper vertical transaction (credit more money in our accounts via spending than it debits from our accounts via taxation).

The real worth of nominal savings depend on the rate of inflation. So if the interest attached to those savings outweighs inflation, your money is not only protected but you're earning something off it as well. That being said, the 'natural' rate of fiat money is zero. Anything above zero is a subsidy, anything below zero is a tax.
Quantitative Easing is just the Central Bank doing a swap operation with the private banks. The CB buys treasuries and bank other bank assets (such as mortgage backed securities, usually split 50/50) in exchange for the same amount of bank reserves. For every amount of reserves the CB brings into the system, it destroys that same amount in private sector assets. QE is just unprinting money in one form and printing it in another. The net is 0.

I agree wholeheartedly with you about the Money Supply. The game should take stock of the sectoral balance. When the foreign sector can't help you out (neutral or net commercial deficit against the rest of the world). When the domestic private sector is deleveraging (spending less, saving more), and if the government sector fiscal position is inadequate (surplus, neutral, or too small deficit) - the evidence is ALWAYS unemployment. And if you have deflation in this period of negative economic growth or zero growth - that simply increases the value of debt. That's why creditors love deflation, and why debtors love inflation.


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This post was last modified: 14.12.2014 13:59 by Helsworth.

14.12.2014 13:57
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Winston957
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Post: #25
RE: Consequences of Money reform II

Hello Helsworth,

sorry for answering late.
Of course you can’t have too much of something you control, that’s true. It will be interesting to observe what happens in Japan, though. And we can keep in mind, while watching, that in the Eurozone country is borrowing in “foreign” currency. But back to money reforms:

As for the private debt levels: Simply recalculating them would send a wave of insolvency’s through the economy. You mentioned pension funds, but it’s true for banks although. Their balance needs to be readjusted since they hold a lot of their assets in public debt. If you don’t adjust their payment obligations, they are out of business. I think insofar it’s not relevant if assets or obligations are private or public IOU’s.

As for the balance (of debt, respectively wealth) in the sectors, which balances themselves to 0: This reminds me a little bit to the saying “if the hunter misses the rabbit once on the left side, and once on the right side, the rabit is statistically dead” (or something like that, I don’t know it in English). What I mean by that is, that your of course absolutely right, but it doesn’t show the whole picture. The sectoral balance says something about debt and wealth which is often not seen and therefore it’s good to make the point. But nevertheless you can have unsustainable levels of debt for some economical subjects, which has some effect on their economical behavior (eg, they consume or invest not much, since they have to pay interest). And as creditor you might have ab dbtor with a high risk of insolvency which would wipe out your nominal wealth. Therefore things can be really unhealthy, even if the balance amounts always to zero in the big picture. That’s where we stand now in real life, IMHO (non financial debt in industrialized countries amounts to 279% of GDP, and not much less in emerging countries). And that’s a problem QE can’t solve (unless you at least monetarize the state’s debt, which also doesn’t solve all problems).Nicely summarized here: http://janelanaweb.com/trends/we-all-are...l-stelter/

You are technically right about QE, bank reserves stay the same, but it doesn’t mean there’s no effect at al: If the CB buys e.g. treasuries (and receive CB money on the CB account) the banks just have money which doesn’t bear any interest. In order to make profit the bank has to do something else. If they will do what the CB’s want them to do is another question. But they could buy other assets of give credit to creditors, they otherwise wouldn’t (just to make profit, they are not more or less restricted by bank reserves). What CB’s are –outspoken in the case of the FED- aiming for is the “wealth effect”, which is comes (in short) from more demand for treasuries, therefore lower rates for “riskless” assets, therefore higher prices of other assets (especially shares and real estate). The idea behind it (making people feel richer, therefore they consume more) is not convincing at all in my opinion, it would be better to give the money directly to the people (an idea that actually is discussed now).

You say the natural interest rate o fiat money is zero. That’s true, since fiat money is not a scarce commodity but can be created “out of thin air”. But money enables people to do things. You can hire people that work for you, buy computers and ressources to produce something. For that end you need money. Therefore money or the distribution of money directs in which projects the existing resources are invested to. The “artificial scarcity” of money by higher interest rates than zero (or an “inapprobriate” fiscal deficit, as you might want to add) has the consequence that not all projects can be realized. Which is necessary as long as resources are limited too. That doesn’say that as long as the economy runs substantially below it’s output potential an interest rate of zero couldn’t be appropriate. But you want to fix the interest rate to zero, if I understand you correctly. How do you see then the scarcity problem? And also: can’t buy every commoditiy in you homemade fiat money, so you have to take into account the exchange rate, too. I am not a friend of free capital markets, but it seems to mee you couldn’t have it with a fixed interest rate of zero at all.

But back to AR an Money Reform II: Money reform in AR doesn’t really take into account the nature of fiat money, it doesn’t take into account the difference it makes in the banking system (bank reform yes/no). I think MR should be not always bad, effects should be dependend of other factors.

Winston

21.12.2014 11:43
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Helsworth
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Post: #26
RE: Consequences of Money reform II

I agree with you one MR2.

The interest rate is a cost on all portfolios. So in order to keep the price for private sector financing low, it's better to have a lower interest rate. That being said, I reject the notion that low or near zero interest rates cause inflation or that they are conducive to economic growth. And I reject the idea that higher interest rates fight inflation or that they slowdown economic activity.

The Central Bank can control the overnight rate without having to sell government securities simply via the federal funds market. Currently, in most countries, Central Banks are allowed to buy gov securities only from the secondary markets. The rich (the dealers) want to profit from a transactions that serves absolutely NO public interest. Central banks can, if the legal framework allows it and it was allowed in the past, to buy directly from the government the securities. Better yet, the Central Bank should simply (in order to do away with all the myths and concerns about public debt (savings accounts)) credit and debit bank accounts to mirror government fiscal policy. There would be no thing such as public debt (as we understand it or don't understand it Happy), but only a record of past fiscal deficits which would be called nongovernment sector accrued assets.

Banks suffer from unperforming assets. The thing is that the value of liabilities (deposits) remains the same. The value of assets (loans) is variable. Naturally, there's bank deposit insurance. So depositors are covered. This is a different story in the Eurozone, simply because currency user governments guarantee those bank deposits, instead of the ECB.

Yes, private debt levels can become unsustainable. Usually, when private debt gets too high and the automatic fiscal stabilizers work counter-cyclically transforming the government's fiscal position neutral or into a surplus - that simply makes the private credit structure fall, because it's not longer supported by the government sector's net spending position - which is now that of net taxer rather than net spender.
So naturally, the money supply contracts because more debts are being paid off or defaulted upon compared to new private debts being contracted.
Private debt levels can be done away with fast via debt moratorium. Simply cancel the debts or a good portion of it according to your desired aims, or simply make a funds injection to everyone from the government. People who don't have any debts can use the funds injection as they wish - either consume it or save it. And those who have bank debts can only use the funds to pay off their debts, not for anything else. There are many ways to skin the cat.

The sectoral balance is a flow chart. Obviously, the accumulation of past net fiscal positions in favor of one sector or the other matters. If private sector savings are high enough, then one year or more of net fiscal surpluses won't harm that much economic activity. It's all about unspent income. If the nongovernment sector (non-residents and domestic households) isn't spending enough, the result is always unemployment. That's why the government needs to cover that spending shortfall, else allow the economy to work at lower levels of employment and output. Which is never sound policy - because there is always more stuff to be done than people to do it. Austerity hurts future generations because it robs future generations of the necessary capital which would have been created if their ancestors had not abstained from doing so out of arbitrary and false economic beliefs. And when I say capital, I'm referring to things like education, health care, infrastructure, and inventories. Capital cannot be quantified; it's a notion similar to love or beauty - once you start to measure it, you get all kinds of answers and none of them useful. Wink


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21.12.2014 19:23
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