Money is Fungible

Maybe I am wrong in the way I look at economics. But one of the founding principles I use is that money is fungible. I learned this word myself not that long ago listening to a sermon where the preacher said that time is fungible. The point of the sermon was to use your time wisely. Here is how Wikipedia defines fungible:

Fungibility is the property of a good or a commodity whose individual units are capable of mutual substitution, such as crude oil, shares in a company, bonds, precious metals, or currencies.

It refers only to the equivalence of each unit of a commodity with other units of the same commodity. Fungibility does not describe or relate to any exchange of one commodity for some other, different commodity.

As an example: if Alice lends Bob a $10 bill, she does not care if she is repaid with the same $10 bill, two $5 bills, a $5 bill and five $1 bills, or bunch of coins that total $10, as currency is fungible. However, if Bob borrows Alice’s car she will most likely be upset if Bob returns a different vehicle—even a vehicle that is the same make and model—as automobiles are not fungible with respect to ownership. However, gasoline is fungible, and though Alice may have a preference for a particular brand and grade of gasoline, her primary concern may be that the level of fuel be the same (or more) as it was when she lent the vehicle to Bob.

A dollar spent on one item cannot be spent on another item. If a person is taxed one dollar, that dollar is no longer spent by the taxpayer. The government spending that dollar does not increase societal wealth. It is at best neutral. We see the money the government spends, but we do not see the money that the taxpayer would have spent. There are exceptions to this. The bridge that is constructed over the Mississippi may result in greater societal benefit than the cost of the bridge. However, when the government does it we often do not build the bridge based on economics, but on the fact that contributor John Smith owns the property next to the bridge. Sometimes you even get the absurdity of the infamous “bridge to nowhere.” In other words the return of the government spending is less than the one dollar of taxes.  

So from my perspective every dollar that is spent by the government that is borrowed or taxed does not offer a stimulus. We see the government spending, but we do not see what the dollar would have been spent on had it not been borrowed or taxed. Basically I am saying that spending on defense or spending on social programs do not help the economy, they are, hopefully neutral. This does not mean that we should not buy the new F-22 Raptor, although we could buy 10 of the old fighter for what one F-22 costs.

Nor does it mean that we should not help the poor. I am only saying that there is no free lunch and that this spending will NOT benefit the economy. What the government does is reallocate resources—mostly badly in my view.  

There is a big exception to what I am saying and that is money printing. Right now the Federal Reserve is spending about one trillion a year buying mortgages and treasury bonds. This is entirely new money and will stimulate the economy, temporarily. If the amount of the fiscal deficit goes down by some method, I would do a budget freeze, as long as the Federal Reserve continues its current practice the stimulus would continue at the present level, even as the budget deficit goes down. 

The main risk I see is that the amount of the debt will reach a tipping point and chaos will ensue. If investors knew that the budget crisis was resolved they would have little concern with governmental bonds. If investors think the problem will NOT be solved, then the crisis will come, and it will not be pretty. 

Better to freeze the budget now, rather than have it implode later. 

Tax the Rich

I thought this video shows some aspects of the fallacy of taxing the rich. Of course everyone is in favor of the rich paying taxes, the real question is how much and what the marginal tax rate is. As I will point out tomorrow, money is fungible. If money is taken away from anyone, this money can not be spent privately. To a degree, taxes are a "zero sum game."

Be Happy: Reduce Your Expectations

There were two ways to be happy: improve your reality, or lower your expectations ― Jodi Picoult, Nineteen Minutes.

We are headed toward a period where we all need to lower our expectations. A long, slow, steady decline is the best we can expect. There are several reasons for this.

The main reason I think we are due for a drop in our standard of living is our dependence on oil. Oil has served the US well over the last century. It has provided the US with an unprecedented freedom in mobility. Most of the great human advances have settled around better transportation. Something as basic as the stirrup had a great effect on history. The sociological implications of the car on American mating rituals has been huge. 

But we have been using up oil faster than new oil is being discovered—even if the Russian theory is correct and oil is seeping up from the depths and oil is not dead dinosaurs. I have been reading books about what is called "peak oil." In particular I read Kunstler's book, The Long Emergency. While I accept the basic premise of peak oil, I was not impressed with peak oil advocates’ reasoning, especially Kunstler's. What they overlook is that other sources on energy can be used to make fuel. The process to make liquid coal has been known for a century and was used extensively by Nazi Germany and Apartheid South Africa. The US can do the same. 

However, there are big drawbacks. It will be a lot more expensive than it has been in the past. Tyler Cowen describes this process in his book, The Great Stagflation. It is only natural that the first things that are harvested are the easiest, the "low hanging fruit" as Cowen calls it. That fruit is long gone. In additional it will be less environmental clean than oil.

What does this mean for you and me? 

Two car families will become one-car families. One-car families will become public transportation users. Since the US is built around the car this will be difficult. In the future the first question in looking at a house will not be "How are the schools?" It will be, "Where are the bus lines?" 

The US must live within its means, and that means more busses and fewer cars. But this does not mean the dystopian future predicted in various bad novels, and a few good ones, and by "peak oil" advocates will occur. The US is headed for declining standards of living as the price of fuel goes up, as it must, but not  Mad Max Beyond the Thunderdome.

So if you are looking for a house to buy, look for a house that has a space for a garden and is a short walking distance to a bus line or shopping. Right now few buyers are looking for this combination. This will change. 

There was an old English proverb I read years ago: income £ 20, expenses £ 19 6p, happiness; income £ 20, expenses £ 20 6p, unhappiness. 

Lower your expectations.

Live within your means. 

If He’s Still Hungry, the Country Is Doomed!

The more I read about the fiscal cliff deal made at the last minute, the worse it looks. The devil, or God, is in the details. For every $40 in tax increases there was $1 in spending cuts, basically a rounding error. There was a lot of corporate pork for well-connected campaign contributors like the movie industry. I wonder how much it cost the algae growers of America for their subsidy? Since these subsidies were used to make the tax increases look less, the actual numbers were like this: for every $80 in tax increases on real people there where $40 in subsidies to various Fat Cats and Lord High Mucky Mucks and $1 in spending cuts, er, reductions in hypothetical spending…there were no actual cuts. 

There were also some stealth tax increases that we are only now finding out about. I read one estimate that charitable contributions will go down by $800 million next year as wealthy people realize that they can no longer write off charitable contributions, losing up to 80% of the deduction. 

I am still guardedly pessimistic that in two months there will actually be spending cuts associated with the needed increase in the debt ceiling. We will see if the Republicans are playing to their base by blowing smoke out of a body orifice. 

Here is what Mark Steyn said in his book, After America:

The prevailing political realities of the United States do not allow for any meaningful course correction. And, without meaningful course correction, America is doomed.

What Steyn means by this is not Mad Max Beyond the Thunderdome, but an end to those things that made America, America, and made people like Steyn immigrate. Here is Steyn’s waggish summary of the bill: 

A space alien on Planet Zongo whose cable package includes Meet the Press could watch ten minutes of these pseudo-cliffhangers and figure out how they always end, every time: Spending goes up, and the revenue gap widens. This latest painstakingly negotiated bipartisan deal to restore fiscal responsibility actually includes a third of a trillion dollars in new spending. A third of a trillion! $330,000,000,000! Fancy that! In most countries, a third of a trillion would be a lot of money. But in the U.S. it’s chump change so footling it’s barely mentioned in the news reports. Then there’s the usual sweetheart deals for those with Washington’s ear: $59 million for algae producers, a $20 million tax break if a Hollywood producer shoots part of a movie in a “depressed area” as opposed to a non-depressed area, like Canada. I’m pitching a script to Paramount called “The Algae That Ate Detroit.”

Sounds like one of the novelty songs in my collection, “The Cockroach that Ate Cincinnati” or “The Eggplant that Ate Chicago.”  Yes, these are real songs. The chorus of “Eggplant” even now echoes in my mind: “If he's still hungry, our whole country’s doomed.” 

I will conclude this post with a clip from the co-chairs of the Bowles-Simpson Commission on the latest deal. 

Ron Paul Interview

Here is the last interview that will be used in the upcoming documentary Bubble.