Episode in Review – Page 3 – Crash Course Criticism

Episode #15 – Imports, Exports, and Exchange Rates

Crash Course came out in Episode 15 to talk about International Trade. Maybe this is a reaction to some political candidates talking about the Chinese trade deficit. Regardless of the motive, this episode was economically sound in content, while the tone may not have been along the same lines.

This Episode’s Major Principle

Imagine that I have a choice of buying an American made TV or a TV made in Malaysia. Because of lower labor costs in Malaysia the imported TV cost $200 less than the American made one. So I buy the imported TV. That may cost jobs at a TV factory in the US but I saved $200 by buying the imported TV.

And what am I gonna do with those $200? I’m gonna spend them on something I couldn’t have afforded if I bought the US TV. Like maybe taking my family out to a baseball game or to a restaurant. That creates jobs in those industries that wouldn’t have existed if I’d bought the more expensive TV.

Remember Episode 2, on comparative advantage? Crash Course has already explained that international trade between two countries helps both countries, even if one is poorer or less productive.

More importantly, international trade doesn’t only help the businesses who are trading, but it helps consumers who are able to save more with each purchase. That money saved can either go to spending on other goods (creating jobs in those areas) or in the bank (which gets lent out to growing businesses).

But in the same breath of mentioning how international trade helps everyone involved (including consumers), Crash Course goes a little off the rails:

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Economic Theory suggests that international trade shuffles jobs from one sector of the economy to another, like from the TV factory to the restaurant. But the quality of these jobs can be markedly different. The guy assembling TVs at the US factory was probably making a lot more at his manufacturing job before he got reshuffled to the burrito assembly line at Chipotle.

As technology improves and consumer demands shift, employees will have to move from certain sectors of the economy to others. But Crash Course does some injustice to the former factory employee. Why would this employee get a job at Chipotle? Because assembling a burrito is like assembling a TV?

If domestic manufacturing shrinks, another sector is likely to grow. And as the factory employee takes a new job somewhere else, his skills and work product will likely determine his pay.

Trade does not just shuffle jobs from one sector to another; it moves jobs from less productive areas of the economy to more productive areas of the economy. If Malaysia is better at producing TVs for a cheaper price (assuming both countries’ TVs are the same in quality), then it’s better to have American employees working in areas that can compete internationally, instead of making TVs that will be no one will buy because it’s too expensive.

What Crash Course did not explain is what happens when protectionist policies prevent international trade (this is sometimes referred to as Mercantilism). For example, let’s say the US government imposes taxes and fees that make the price of Malaysian TVs higher than US TVs. It will keep that factory employee at the manufacturing plant, but everyone else in the economy will be worse off, as they have to pay more of their paycheck for their TV.

NAFTA

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NAFTA is a polarizing political issue, and depending on which camp you’re most affiliated with, you will regard the agreement as either a huge success and a catastrophic failure. For example, Democrat Party loyalists or Bill Clinton supporters will call it success, since it happened under his presidency. Labor Unions hate it, since it removed trade barriers that kept some American producers afloat (like the TV example explained above). Libertarians and free marketeers are a mix about it, for reasons I will explain.

Like the TPP agreement currently in the works, NAFTA was heavily influenced by corporate interests, and parts of the agreement were tailored specifically to benefit these companies. NAFTA was a free market international agreement, but not for all goods across the board, just the ones outlined in the legislation. NAFTA was a move toward freer markets, but it was orchestrated in a way that reeked of cronyism.

Thus, politicians and pundits alike had to choose sides: Do I support the Democratic Party more than I support Labor Unions? Do I support free markets more than I oppose crony legislation?

Crash Course comes down in favor of NAFTA, as they should if they were looking purely at economic benefits:

So despite the fact that some workers and industries were clearly hurt, economists would tell us NAFTA has had a net positive impact on all three countries.

Are Trade Deficits Bad?

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Crash Course doesn’t clearly explain how they stand on trade deficits, but you can infer from the end of video that although they agree they make everyone better off, they sympathize (possibly more so) with those who are negatively affected by international trade:

In purely economic terms trade deficits and surpluses are the result of people and nations seeking their own self-interests. But while everyone is acting in the self-interested way, international trade doesn’t always meet our individual interests. What might be good for the wider global economy, might be really bad for me or my hometown. But in the aggregate, trade does improve the global standard of living. It’s just sometimes hard to see up close.

As I mentioned before, the alternative to international trade makes everyone worse off. While it’s easier to witness the negative effects of international trade (since people are laid off), it would be much worse if domestic businesses were protected from international competition. Resources would be wasted, prices would be higher, and the living standards of everyone (rich and poor alike) would be worse.

As a final note, Crash Course never responds to people who say that trade deficits “ship jobs overseas”. An excerpt from this article does an excellent job at illustrating why this does not happen:

If say Toyota sells a Japanese-manufactured car in the United States, then they have two options as to what they shall do with the money: either buy American goods and services, in case which the trade deficit does not increase, or they can buy American assets which will increase the pool of funding for investments in America, or they can try to exchange the dollars earned into yen, which someone will have to sell to them and then use it for one of Toyota’s two first options.

Trade deficits are offset by capital surpluses, which in this case is Toyota having to spend US dollars somewhere in the American economy. These dollars, in addition to the dollars saved by Americans who buy a cheaper Toyota instead of a more expensive Ford car, contribute to the economy and create growth (and jobs) in other areas.

Episode #14 – Economic Schools of Thought

If you’re a regular reader of this blog, you saw the title of the thirteenth episode and thought it was too good to be true. Economic Schools of Thought? This might be the most important episode yet!

Personally, I think it was, as it does put the entire Crash Course series into perspective. I was really impressed with this video, so I’m going to start with the good things first:

Feathers in Your Cap, Crash Course

You do care!

First, it appears that Crash Course reads the comments section of youtube, something I’ve advised against doing in general, but it’s nice to see that Crash Course cares about its fans and what they want to learn about. Can you imagine if public schools were like this?

People are Often Wrong

Crash Course mentioned how all popular theories in science could be proven wrong.:

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In 1798 British Economist Thomas Malthus argued that population growth will outpace food production, so eventually humans will run out of food […] Malthus was wrong, dismally wrong.

Economic theories are constantly being proven, disproven, and revised. The problem is , when these theories are wrong, millions of people can be adversely affected.

Here is where Crash Course could have thrown in how Malthus’s theory inspired some rather terrible political policies (eugenics). I don’t think the numbers were in the millions, though.

Again, Economics is not a Physical Science

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Economics is not an exact science. It aims to draw conclusions about human behavior without the benefits of labs or perfect control groups. Economic theories reflect different attitudes about human nature, and those are likely to change over time.

Crash Course then goes through a the history of theories, including Communism and the Austrian School.

A Couple Critiques

I couldn’t let this episode go without pointing out a few (only a few though!) problems I had with the things said in the video.

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The Great Depression crashed the market economies of the world’s richest countries. It also dealt a devastating blow to classical economics.

This is true; however, something needs to be said about Monetary Policy here. Certainly many people saw the Great Depression as evidence that the market doesn’t work, later schools of thought (The Austrian School and to a great extent, the Chicago School) explain the Great Depression was caused by increased government intervention into monetary policy.

Communists would probably say the same thing when Crash Course mentions how Communism failed. They would likely argue that it wasn’t communism that failed, it was just that these regimes didn’t implement it the right way (although I admit I’m less familiar with these arguments so I might not do them justice).

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The Austrian School today argues that the economy is just too complicated to manipulate.

That sort of summarizes it, I suppose. I would say that the Austrian School argues that any artificial manipulations to the market (including the interest rate) create a less efficient economy that does not meet consumer needs as well as an economy free from intervention. Crash Course’s definition makes it seem like Austrians are economic agnostics.

Overall, this Crash Course video was fantastic. It introduced and explained (however briefly) different schools of economic thought, and more or less admitted that Crash Course teaches a specific school of thought, which combines Keynesianism and Classical Economics into something called New Neoclassical Synthesis. It’s almost like Crash Course admits that these videos are just, like, their opinion .

Episode #13 – Recession, Hyperinflation, and Stagflation

It’s been a while, I know. I’m still about 4 episodes behind, but I’m about to start publishing my posts on a fixed schedule to catch up, and so you know when to expect them. Stay tuned for more info in the next post.

As per usual, this episode of Crash Course was a mixed bag of good, bad, and glossed-over economics. I’m going to start with the most egregious mistake:

Military Spending

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Getting out of the depression took nearly a decade, and it wasn’t really monetary policy that put an end to it. It was the massive government spending of World War II.

But Adriene! Remember what you said in Episode 1?:

Military spending in the United States is over $600 billion per year. That’s close to what the next top 10 countries spend combined…the opportunity cost of [each] aircraft carrier could be hospitals, schools, and roads.

I realize now that Crash Course believes any and all government spending is good for the economy, including things that do not benefit the public generally. If you remember back to their discussion of opportunity cost in week one, every dollar spent (either by government or private persons) could be spent somewhere else (also either by government or private persons). So why would Crash Course think that military spending can help get the government out of depressions?

In short: Keynesianism. We talked about the show’s Keynesian Presuppositions before, but this makes it clear: Crash Course believes spending is what fuels the economy. When people are not spending, governments need to step in and (tax and) spend for them! If you recall, we critiqued this idea in episode 5, so I won’t go through it again, but in short: saving also fuels the economy.

Monetary Balance

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An increase in the money supply can have two effects. It can increase output or increase prices or some combination of the two. Inflation starts when output is pushed to capacity and can’t rise much further, but policymakers continue to increase the money supply. In theory, once output is maximized, the more money you print, them more inflation you’ll get.

This theory, stated as fact here in Crash Course, is one of multiple ideas of how the money supply affects the economy.

First, the “output or price” dichotomy is generally not how most economists think of money printing. All economic schools of thought believe that money printing will always increase prices, but some economists think that the boost to output is worth the pain of rising prices. It’s not an either/or scenario; it’s an “is it worth it” scenario. Sometimes the price inflation doesn’t occur immediately, but as the money circulates, prices will rise.

The Austrian School however, argues that money printing will distort the economy, flooding money into certain areas and creating bubbles, only to eventually crash and do even more harm than if the government had not interfered at all.

Hyperinflation

Crash Course rightly puts some of the blame for hyperinflation on central banks who print money to oblivion, but they also seem to blame consumers:

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After a couple of years of doubling prices, people started to expect high inflation, and that changed their behavior. Say you’re planning to buy a new refrigerator, and you expect prices to rise quickly. You buy it as soon as possible before the prices have a chance to change, but with everyone following that logic, dollars start to circulate faster and faster and faster.

Economists call the number of times a dollar is spent per year the velocity of money. When people spend their money as quickly as they get it, that increases velocity, which pushes inflation up even faster.

Consumers do not create inflation (central banks do), but they can speed up or slow down how long it takes for the newly printed money to affect prices. If the central bank printed a bunch of money but kept it out of circulation, prices would not rise, but when that money starts to circulate, then prices rise. Once the new money is out there, it can take a long time or a short time for that to affect prices, but the eventual rise in prices is due to the initial money printing.

But Crash Course seems to think that consumers’ eagerness to spend is what pushes prices up, even if the printing has stopped.

Let’s imagine an economy without a central bank setting interest rates, and instead, interest rates were determined by the market. If something like this were to happen and everyone quickly spent their money as soon as they received it, businesses who wanted large loans would have a very hard time getting them, since money is being spent instead of saved. The most in need of loans would be willing to pay a premium for it, and banks would offer high interest rates to encourage people to save money, so they could lend it out to businesses. People would eventually stop spending as much as they notice that it would be more beneficial to save their money and collect a high interest rate.

Once a central bank enters the picture, interest rates are held artificially below the market rate, encouraging people not to save and for banks to borrow more newly-printed money from the central bank for a low rate.

Later in the video, Crash Course uses the same logic to talk about rapid deflation: consumers’ expectation of lower future prices keeps them from spending and sends prices further down. It’s a much harder argument to make for them, and we’ve already covered this argument in this post.

Stagflation

Crash Course correctly identifies what Stagflation is: when the economy is not improving but prices rise quickly. But when they explain the United States stagflation, they miss a key point:

The US experience Stagflation starting in the 1970’s after a series of supply shocks, including a rise in oil prices, and believe it or not, a die up of Peruvian anchovies, which were important for animal feed and fertilizer.

I’ll pick the “not” option. Natural disasters and supply shocks can have negative (or stagnant) effects on the economy, but these do not cause the inflation part of the stagflation formula. What does this have to do with central bank money printing?

It was very surprising to hear an entire section on Stagflation without mention of the Bretton-Woods System and the United States’ complete removal from the gold standard. That’s almost like talking about the 2008 financial crisis without mentioning FEHA or Fannie Mae.

Bretton-Woods was a monetary system that the United States had from 1944 to 1971. It was a quasi-gold standard, where the government still fixed the price of US dollars to gold. The Bretton-Woods System also establish the US Dollar as a reserve currency, and allowed foreign countries to trade their US dollars for gold at the fixed rate.

Throughout the 1960’s, US money printing made many international countries nervous about the dollar’s viability, and many of them exchanged their US dollars for gold. Eventually, the United States ended its international dollar/gold exchange, thus ending the Bretton Woods system and creating free floating fiat currencies across the globe.

Naturally, the end of the Bretton Woods system caused the US dollar to plummet in value relative to foreign currencies. It became very expensive to import items and for US companies to do business internationally. The resulting strain on international trade caused prices to soar in the United States.

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

Episode #12 – The 2008 Financial Crisis

Personal Note: It’s been a while since I’ve made a post, and my apologies for that. I currently have a lot on my plate in my non-CCC life (believe it or not, this is not my day job), but I’ve recently received some thoughtful emails concerned with if I have given up or not. In the blogging world (or any project in digital media for that matter) it can be tough to stick with it, but the encouraging messages like the few I’ve received do make a difference, and for that, this project is revitalized and will be as great as ever. And away we go…

This episode is a mammoth. The 2008 financial crisis is one of the most significant moments in US economic history. 600-page books and hours-long debates have dedicated themselves to this topic, and Crash Course bravely tries to sum it all up in about 10 minutes. That’s a tough task for anyone to do.

For the most part, the facts in the Crash Course video are 100% objectively correct. The subjective element, however, comes in with the particular ways the hosts describe the events to imply that something is good or bad. My other main objection to the video comes with what it chooses not to include, despite it being very, very important to what happened.

Mortgages and Lending Practices

It’s very difficult to simply explain what caused the financial crisis without sounding partisan, but I usually explain it this way: banks gave home loans to people who couldn’t pay them back in the future.

This is a good starting point. Now, whether you want to argue that these loans were made because of capitalist greed or government-created incentives is where the partisan stuff starts coming in. But let’s look at how Crash Course explains it:

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Investors were pretty desperate to buy more and more and more of these [mortgage-backed] securities so lenders did their best to help create more of them, but to create more of them, they needed more mortgages, so lenders loosened their standards and made loans to people with low income and poor credit. You’ll hear these called subprime mortgages.

Eventually, some institutions even used what are called predatory lending practices to generate mortgages. They made loans without verifying income and offered absurd adjustible-rate mortgages with payments people could afford at first, but it quickly ballooned beyond their means.

If you, as an intelligent Crash Course fan, thought critically about the implications of making bad loans, you would ask youself: Why weren’t lenders worried about not being paid back? Would you, intelligent Crash Course fan, make a loan of $20 to a random person who approached you on the street if he said he would pay you back $40 in a week? You probably wouldn’t, because he probably wouldn’t pay you back and you don’t want to lose $20. So why would enourmous financial institutions in the business of giving mortgages make loans to untrustworthy borrowers? Why would anyone willingly agree to something that will lose them money? We’ll return to this in a bit.

Financial Products from Morgages

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After our Crash Course hosts briefly talk about the root of the problem (bad mortgages), they spend several minutes on different new financial products derived from mortgages. These Mortgage-backed Securities include CDOs and Credit Default Swaps. Crash Course’s explanations of these financial instruments are pretty accurate (from my knowledge), so I don’t think many people, regardless of their political persuasion or economic school of thought, would take issue to how they explained these.

Another accurate point by Crash Course is how leveraged these financial institutions were. A lot of these firms were holding a large number of these bad financial products as safe assets, especially since the credit-rating agencies rated them the highest rating (AAA).

Credit Rating Agencies

Crash Course mentioned at the beginning of the video the role that the credit-rating agencies played:

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They gave a lot of these mortgage-backed securities AAA ratings–The best of the best. And back when mortgages were only for borrowers with good credit, mortgage debt was a good investment.

So all these new financial products came onto the scene, and the credit-rating agencies were still rating them AAA, giving a guarantee of the high probability of them being paid back. They were, of course, completely wrong on this.

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No one knew how bad the balance sheets at some of these financial instutions really were –these complicated, unregulated assets made it hard to tell.

With these two words, Crash Course has diagnosed the problem (assets are too complicated), and has already prescribed the solution (regulation).

The word “unregulated” here is a bit of a misnomer. Since the financial sector is the most regulated industry in the country, and there exists an enormous agency just for securities (the SEC), calling any financial product unregulated would be a stretch. However, there were not any specific regulations on these particular financial products, which seems to be what the issue really is. But since mortgages were heavily regulated and regulators couldn’t stop bad mortgage loans from happening, I doubt any regulation specific to these financial products made before the crash would have done any good.

Crash Course is completely right on their point about how complicated these new securities were. They were very complicated. But who is in charge of verifying the quality of complicated assets? The credit-rating agencies.

Crash Course seems to be giving the credit-rating agencies some slack here, forgiving them for giving good ratings to bad securities because the securities were complicated.

What’s Missing

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Crash Course then goes on to talk about the government response to the crisis: bailouts, stimulus, and Dodd-Frank. Other than the similar partisan phrasing as I mentioned previously, most of their telling of history is spot on.

Mr. Clifford then talked about certain principles (Perverse Incentives, Moral Hazard) that created the crisis, and Adriene summed up the Financial Crisis Inquiry Commision’s report, which blamed the regulators (for not doing enough) and too much faith in free markets.

It seems like Crash Course leaves it at that: either it’s the fault of the financial instutitions, regulators not doing enough, or the free markets. Pick who to blame among these three.

It’s astonishing to see no mention of any government action (as opposed to inaction) that is to blame for the crash.

Fannie Mae and Freddie Mac were two Government Sponsored Enterprises (SPE) that purchased many subprime mortgages, as they were directed to hold a large number of assets related to affordable housing. These SPEs contributed significantly to the high demand of subprime mortages and banks issuing these mortgages, since they could be quickly sold to the SPEs for a profit.

The Federal Housing Administration was also missing from the video. The FHA encouraged banks to issue subprime mortgages by guaranteeing their repayment through their FHA insurance policy. If a third party takes away all the risk of giving a loan, then why wouldn’t a bank want to give more loans, even if they are to untrustworthy lenders?

These government actors could have been included under Mr. Clifford’s “Moral Hazard” explanation, but it was nowhere to be found.

Crash Course is correct when they say that the financial crisis is incredibly complicated and caused by many different things; however, a little critical thinking would have you leaving this video with more questions than answers. This post is a brief alternative explanation from Crash Course’s video, but the official Crash Course video left a lot to be explained and the subject deserves multiple explanations.

For a more thorough explanation of the crisis from a free-market perspective, I strongly recommend Tom Woods’ Meltdown.

Thanks for sticking with me, fans of CCC. I’m still 3 episodes behind, but I’ll try to catch back up ASAP.

-Gary

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?

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

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.

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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?

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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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