Month: October 2015

Episode #11, Money and Finance

Crash Course’s episode this week (or rather, last week, I seem to be consistently a week behind) covers two subjects: Money and Finance.  The episode is pretty much split down the middle between the two subjects.  I thought their explanation of Finance was pretty accurate, while their explanation of money needs some clarification

Money

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Technically, money is anything that’s used a medium of exchange.

This is a great move by Crash Course.  While this may seem like an obvious statement to most, Crash Course could have taken a different approach, defining money as something only governments can certify.  Their example of the use of cigarrettes (or pouches of mackerel) in prison prove that money can be anything, as long as people accept it.

The Bitcoin Question

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Another form of digital money you often hear about it Bitcoin.  Bitcoin is a virtual currency that is not issued or regulated by a specfic country, but since some people accept it as payment, many economists consider it money.

Crash Course could probably do a full episode on the question of whether Bitcoin can be considered a currency.  They fall short of doing that here, instead opting for the “most economists…” line that Crash Course often uses in lieu of providing both sides of the argument.

Those who argue against Bitcoin being money aren’t just old curmudgeon economists who are resistant to new developments in technology.  The argument against Bitcoin being money is that it contains no inherent value.  In other words, cigarrettes can be smoked, mackerel can be eaten, gold can be worn as jewely, US dollars are the only thing you can legally use (or pay your taxes with) as money in the US.  Bitcoin is not physical and cannot be used as anything other than a medium of exchange, so some people have problems with considering it money.

Before Crash Course makes you think that they like Bitcoin too much, they remind you that it’s associated with illegal activities:

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Unlike other electronic currency, Bitcoin doesn’t involve a bank, so people can in theory buy things more anonymously.  This appeals to people who don’t trust central banks and also people who want to buy illegal stuff online.  That illegal trade means law enforcement and regulators are also very interested in Bitcoin.

No comment from Crash Course on what is the most popular money for illegal stuff offline (it’s the US Dollar).

Gold

Did you notice something missing when Crash Course went through numerous historical examples of money?

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Coins have been used for thousands of year, and they are a great example of money […] Animals like cattle and sheep, also stacks of grain, all these have been used as money.  Some societies even used feathers or shells.  The indiginous people on Yap Island in the Pacific Ocean used money called Rai Stone…

I found it strange that Crash Course did not want to mention that gold is the most consistent money throughout cultures and countries in history.  Many of the coins in history were made of precious metals.  I know that Crash Course wanted to go into the Gold Standard later in the video, but it seemed strange that they left gold out of the list of historical examples of money.

The Gold Standard

This is another topic worthy of its own video, and unfortuntely Crash Course quickly explained away arguments for the gold standard:

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There is kind of a glaring question here: what makes these pieces of paper so valuable?  Well, in the past each dollar issued by the US government was redeemable for a specific amount of gold.  That was called the Gold Standard, and it meant that the government couldn’t issue more money than it had in gold reserves.  Back in the 1930’s the US decided to move off the Gold Standard, and some people freaked out about not having something tangible to back our money, but it’s important to remember that money, whether it’s cash or gold or small pouches of mackerel, is all about confidence.

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Nobel Prize-winning economist Milton Friedman once said “The pieces of green paper have value because everyone thinks they have value.”  With that in mind, a gold standard, or even a Mackerel Standard, might not make money more valuable or reliable.

A lot of economists agree with this (!), which is why no country uses the Gold Standard.

Crash Course’s final argument against the Gold Standard here is that “it might not make money more valuable or reliable.”  No talk about the benefits of going off the gold standard, just that the Gold Standard may or may be good.  And by the way, most economists agree with this, so you should just accept it.

This is hardly an argument at all.  The real argument for the gold standard goes back to what our co-host Mr. Clifford said earlier: “the government couldn’t issue more money than it had in gold reserves.”

Governments were fiscally constrained by the gold standard, since they couldn’t print money without backing it with gold (and you can’t just print gold like you can money).  So in order to solve these government spending problems, the US went off the Gold Standard to allow the government to print and spend without much constraint.

Of course, as Mr. Clifford said, people were nervous about going off the gold standard.  You’d expect people to exchange their dollars for gold in panic, but to protect against this, in 1933, all Americans were forced to give their gold to the government at an exchange rate determined by the government.  The option of buying gold was not legally available to Americans until 1971.

A lot of economists agree with this, which is why no country uses the Gold Standard.

Countries do not implement policies because economists agree on them.  In fact, there are a lot of things economists agree on government policy goes directly against.  The real reason why no country is on the gold standard is because it allows governments to print and spend without restraint.

Finance

Not much in terms of criticism here.  The second half of Crash Course’s video was pretty informative and unobjectionable, talking about how Loans, Bonds, Stocks, Equity, and Debt work.  Compared to the first half of the video, this was a very solid explanation of finance.

While the explanation of these financial instruments aren’t economics per se, it is important to understand what all of these things mean, especially when talking about macroeconomic policy and next week’s subject, Economic Crises.  Did you see anything objectionable in their section on Finance?

 

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Crash Course Episode #10, Monetary Policy and the Federal Reserve

This topic had to come up in a course about economics: Monetary Policy and the Federal Reserve.  This episode was mostly informative and less opinionated than other episodes, but there were still some major problems that need clarification:

“Decreasing the Money Supply”

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Crash Course mentioned that the Fed can increase the money supply through different means in an expansionary policy, but they also said many times that in a contractionary policy, the Fed can decrease the money supply.  They even mentioned as an example that in the 1970’s, Fed Chair Paul Volcker decreased the money supply to combat inflation.

A decrease in the money supply would mean that the Fed is literally taking money out circulation and eliminating it, so there are fewer dollars circulating in the economy.  This never happens.

What does happen (and what Paul Volcker did) was increase the discount rate so that money was being created at a much slower rate.  Since the Fed creates money and lends it to commercial banks at the discount rate, increasing the discount rate would mean that fewer loans are made to banks, so less money is being created.

So the Money Supply never decreases, it just slows the rate of increase.  These are two very different things, as important as the difference between the deficit and the debt.

The Great Depression

Crash Course often says that answers to certain economic questions are very complicated, but they don’t seem to have a problem with claiming what prolonged the great depression:

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The Fed gets blamed for prolonging the Depression because it didn’t give banks emergency loans, which would have increased the liquidity in banks and the money supply in general.

This is a very big statement about the Great Depression, essentially arguing that the Depression would not have been as bad if the Fed had just bailed out the banks.

This is a highly debatable suggestion to say the least, as economists and historians still disagree about what made the Great Depression so severe, compared to previous slumps.  It is very likely a combination of monetary and fiscal policy, and The Austrian School would even suggest that the Fed’s very expansionary policy throughout the 1920’s caused the Great Depression’s severity.

Additionally, since the United States did bail out banks following the 2008 financial crisis, why was the recession so prolonged?

Why Has There Not Been Any Inflation?

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If the Fed has been increasing the money supply steadily since 2008, why has the actual inflation rate stayed so low?

Crash Course gives three possible answers to this: 1. Banks are not lending out the money they receive from the Fed, so the dollars are not circulating to increase prices.  2.  Uncertainty in Europe, which means foreign investors are holding US Dollars, so again, they are not circulating and raising prices.  3.  The economy is still sputtering.

For number 3, why would low inflation be the result of a bad economy?  I suppose that Crash Course is saying that too many people are saving instead of spending, so money is not circulating in the economy and pushing prices up.  This brings us back to our discussion on Deflation, Saving, and Spending, which I won’t rewrite here.

An alternative explanation that Crash Course did not mentioned is that prices are rising quickly in certain sectors of the economy, namely housing (again) and high-priced luxury goods.  If the newly-printed money is only being used in these areas, it will take longer before the prices of normal consumer goods rise.

 

As I mentioned at the beginning, a lot of this episode was an explanation of what the Fed does, since it’s probably not common knowledge for the normal Crash Course fan.  Besides these few (albeit major, especially the first one on decreasing the money supply) errors or opinions, the episode on the whole was pretty informative, and it did a good job at explaning a very difficult concept quite clearly.

Like what I wrote?  Hate it?  Drop some feedback in the comments.

As an Aside…

Yes I know episode #10 is out, and I will be publishing at least one post about it later this week (hoping for Tuesday night or Friday night).

I wanted to draw attention to a podcast that recently debuted doing almost exactly the same thing I do here at CC, except in podcast form and critiquing a much more well-known economics scholar.

Tom Woods and Bob Murphy (both of the Austrian persuasion) release a podcast every week critiquing probably the most well-known economist today: Paul Krugman.

Krugman is generally a Keynesian (and on the left of the political spectrum, which he makes known), although he has moments that stray from traditional Keynesian thought.

Regardless of what economic school of thought you favor, if you like the critiques the we do here at CCC, you might like this podcast, called Contra Krugman.  I’m also hoping that someone of the Keynesian (or other) persuasion will create the site contrakrugmancriticism.com, and then we can really have something!

Critiques and Criticism (in the neutral sense of the word) stengthen everyone’s arguments and understanding of these issues we discuss.  It’s great to see more of them popping up.

Side note: I like to listen to podcasts using the player.fm app (no, they don’t pay me).  If you are unsatisfied with your podcasting app (as I was with both Stitcher and Pocketcasts), you might give this one a try.

Stay tuned for my critique of Episode 10!

-Gary

 

Crash Course Episode #9, Deficits and Debt, Part 2

Debt and Interest Rates

Toward the end of the video, our co-host Adriene talks about default, a terrible thing for any country.  After all this gloomy talk about how much debt the United States has, Adriene brings up a positive point:

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There is good news for the US.  First, both American and foreign lenders charge the US government extremely low interest on its loans.  That means they are confident in the government’s ability to pay them back.  And the low interest rates actually make it easier for the government to pay.

This is true, but Adriene fails fails to mention why the interest rates are so low in the first place.  Lenders don’t just give the government a good deal because they are feeling generous.  US interest rates are controlled by the Federal Reserve, and people (along with companies and foreign governments) lend the government money at the rate controlled by the US government.

The US government also controls money printing and taxing hundreds of millions of people, so you can be pretty sure that you are going to be paid back one way or another  But what if you’re paid back in future US Dollars that have been completely devalued?

Economic-US-Dollar

There is another reason why people are confident in the government’s ability to pay back the loans (that are worth something): reserve currency status.  In international trade, businesses (or governments) can always set the prices of goods they are trading in US dollars, since other countries also accept US dollars.  For example, if India is selling goods to Australia, India would prefer to receive US Dollars, because then India could buy goods from China, who also accepts US Dollars.

Since the US Dollar is the reserve currency, it is afforded certain privileges that other countries’ currencies do not have.  With foreign businesses and governments trading and holding on to US dollars, the demand for the US dollar remains consistantly high.

Imagine if you were a business holding on to Thailand’s currency, the Baht, for some reason.  If Thailand announced that it would lower its interest rates and launch its own QE program, you might be worried that the value of your Thai Baht would decrease as Thailand’s central bank is printing more more (and you would be right).  The Baht’s future value, to you, is unpredictable, and you wouldn’t want to stick around to see what happens to your savings.

Imagine, however, that you were instead holding US Dollars.  The US Federal Reserve starts printing money, weakening your savings, but everyone country still trades in US Dollars, and you need to hold on to your US Dollars for possible future international purchases.  Switching to a new reserve currency would require a lot of international governmental collaboration, and this doesn’t seem to be happening anytime soon.

Maybe Things Aren’t So Bad

While it may seem like the growing US deficit and historic debt will bankrupt the economy, Crash Course says it’s not that simple:

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So is all this deficit and debt going to destroy the American way of life?  Like most things in economics and Crash Course, the answer is complicated, and it depends a lot on what you’re looking at in addition to your political point of view.  Looking at debt from the past or even the present is a good way to have political arguments, but it may not be a great way to think about the future.  

Right now health care spending is driving the debt higher, but if a massive pandemic kills of half the world or there’s a zombie apocalypse, aften an initial spike, those health care costs are going to fall, and frankly, in that case, the national debt and deficit spending will be the least of our worries.

Translation: I know it looks like rising health care costs and government spending are going to destroy American prosperity, but maybe not!  There might be a pandemic or a zombie apocalypse!  Then the debt won’t matter.

Is this the best case scenario that Crash Course can think of to assure as that the debt and deficit are not a problem, or is this a roundabout way of saying that there really is something to worry about?  I don’t know what Crash Course was trying to get at with this sentence.

This is where Crash Course strays from their previously Keynesian bias.  A real Keynesian would say that the debt can continue to rise, as long as other countries keep the dollar as a reserve currency and people still have faith, the dollar will be fine.  If other institutions are not concerned about our currency now (considering the projected rise in the deficit and no chance that the US will start paying back its debt), then will they ever?

I can’t give you much of an optomistic predeiction, and apparently, neither can Crash Course.  But what do you, esteemed Crash Course Criticism reader, think will happen with the future of the US dollar?

 

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Crash Course Episode #9, Deficits and Debt, Part 1

In this week’s episode of Crash Course Economics, the hosts talk about deficits and debt.  This episode might have better scheduled if it were before the videos on Keynesian Macroeconomic Policy, where they talked about deficits and debt, only to define the terms later.

Debt and Spending

Crash Course opens the episode by defining the terms debt and deficit, and explaining how the United States has the largest debt of any country, but the US debt as a percentage of GDP is not as high as a few other countries whose economies are doing fine, namely Japan.  However, the major concern isn’t the current size of the debt, but the growing deficit.

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Most economists are not worried about the borrowing that the US has done already, because they are too worries about the borrowing they’re going to do.

This is true, and as shown in the graph above, the US deficit is scheduled to increase through in future decades as government spending increases.

In the “too much spending vs. not enough revenue” argument, Crash Course shows that revenue (i.e. taxes, fees, tariffs, etc.) is set to increase (as a percentage of GDP) in the coming decades, so this is “not the problem”.  While this is a subjective political argument (socialists and progressives might say that taxes are not high enough), we’ll assume that what she meant was that the increasing deficit is caused by increasing government spending, not decreasing revenue.

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To de-politicize the spending issue, our co-host Adriene gives her explanation of which side is right when it comes to the question of “Where is there too much spending?”:

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Let’s look at where the government actually spends its money.  Conservatives might complain “It’s obvious!  Handouts!”  Liberals will say “It’s obvious!  Defense!” Well, they’re both wrong.  So who’s the biggest recipient of federal dollars?

Grandma and Grandpa.  The government spends about a quarter of the budget on Social Security, and another quarter on healthcare programs.  A lot of that goes to retired people on Medicare.  They deserve it!  They worked hard.  And those are the programs that are expected to grow as baby boomers retire and live longer.  Defense and other discretionary programs are actually projected to shrink slightly as a percentage of GDP.

First, let’s ignore the out-of-place and opinionated commentary of “they deserve it!  They worked hard.”

Second, while retirement spending is scheduled to increase significantly, so is defense.

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The graph above shows the nominal costs of the Department of Defense.  Until about 2022, there is an increase in spending.  After that, it will stay at about 600 billion per year.

However, Adriene is right that Defense will shrink as a percentage of GDP, as you can see in the graph above.  So if we’re looking at the cause of the increase in the deficit, as opposed to the already large deficit/debt or spending in general, she is correct.

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Also, if tax-funded healthcare for the elderly is one of the leading causes of the increasing deficit, are conservatives actually wrong when they complain about “handouts”?  I understand that Crash Course tries to remain politically neutral, but if the argument is between handouts vs. defense being the cause of a rising deficit, and you explain that Medicare is a primary cause, conservatives (in this case) are not wrong.

Also, in the liberals vs. conservatives argument, rarely have I heard the argument phrased within the context of defecit as percentage of GDP.  Liberals are usually arguing that there is and has been too much defense spending generally, and conservatives argue against handouts being such a large part of the budget generally.

Debt and Borrowing

Our co-host Mr. Clifford explains how the US finances its debt:

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First, to borrow, you need lenders, people who have decided to save money and loan it out, rather than spend it on something else.  But there is a finite amount of money that savers can lend, and most of that savings is borrowed by the private sector, which is consumer that take out car loans and businesses that pay for things like factories and computers.

When the government runs a budget deficit, it borrows from that same pool of savings.  And if the government continues to borrow, many economists worry that there will be fewer loans available for businesses, and that will hurt the long-run growth of the economy.

This is a huge misrepresentation of how government fuels its debt.  Here is a graph that accurately shows who hold the government debt:

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As you can see, domestic private investors, like what Mr. Clifford was talking about, account for less than 15% of government debt.  The largest portion (34%) comes from international investors, which could be foreign governments or foreign citizens who are lending money to the US government and hoping to be paid back when the bond matures.

Federal Accounts accounts for 28%.  This is where the government essentially borrows money from itself.  Since different departments have different budgets, and some don’t necessarily need to spend it this year (for example, the budget that holds the Social Security deposits you’ve contributing to and hoping to get back eventually), other departments can borrow from those accounts and promise to pay it back later.

The Federal Reserve accounts for 14% of the debt.  This is when the government creates money with a push of a button and buys treasury bonds (which is what you get when you loan money to the government).  When the loans matures, the money is then just put into the treasury.

This is a big misrepresentation by Crash Course, and I was very surprised that they described US debt holders as only domestic lenders.  How did this script get through production without someone saying “maybe we should say that this is only about 15% of debt, and there are many other ways the US finances its debt?”

We’ll pick back up with the rest of the video in Part 2.  Stay tuned to see what Crash Course says about interest rates, and scenarios when spending might not get out of control.

 

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