Written by Roger Erickson
Redefining Fiscal Policy “Outcomes” so That Our Definition of Successful Investing Isn’t Depriving our Grandchildren of Options
Surprisingly, successful fiscal policy outcomes aren’t even defined by our current policy staff – which tells you a lot. Not to be easily daunted, let’s press on and see what we can come up with by common sense alone.
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Lets start by agreeing that successful outcomes can always be interpreted in short, medium and long-term metrics. If so, then how about these?
- just-adequate liquidity among fiat currency users; enough liquidity as necessary, but no more (at zero cost for adding it)?
- optimized proportional population employment; use us or lose us?
- survival of the country, including the capabilities/affinity/loyalty of US citizens?
Sure, there are measures that supposedly let the public track success, but, even if they’re useful, that doesn’t mean that they’re used. Most of our prior policy problems were taken care of by the Automatic Stabilizers enacted during the 1930s-1940s (social security, FDIC, unemployment benefits, etc, etc). The main problem remaining is Control Fraud (google William K. Black), and that’s only because we let crooks talk us into deregulating financial crime, right up to repealing Glass-Steagall.
The worst outcomes follow when we let dishonest Control Frauds occupy policy positions where they can subvert power and public responsibility to narrower purposes. If we simply controlled the level of fraud, we’d notice more of the insanely great group-options that diverse citizens are clamoring for us to explore.
“we let crooks talk us into deregulating financial crime, right up to repealing Glass-Steagall.”
Everything else comes down to friction between merchants and non-merchants, waged through the battle to manage our fiat currency supply. That battle involves either restricting currency supply in order to preserve the buying power of hoarded cash, or letting the unitary buying power steadily depreciate, while preserving minimum liquidity by letting private-income (= “public-deficit”) float. Let’s see how many grasp the following argument.
How do we afford to pay the “fiat interest on fiat currency bonds?”
If carried far enough, that discussion eventually leads to 2 points.
1) First, we can’t fail to pay the interest, since we can always generate as much fiat liquidity units as we want. Why? Because identifying information is thrown off or broadcast by any and all processesses. “Bookkeeping in any organized system is infinitely self-generating. It is an incidental byproduct of the system itself.” Which means that liquidity is also self-generating. Bookkeeping, liquidity and autocatalysis are all just forms of associative learning by a complex system. Our rate of adaptive organization accelerates proportional to the rate at which our group-wide pattern recognition scales. Social credit in a culture always tracks how much you know about the entity you extend credit to. For speed and portability, we assign currency units to many – but not all – social credits.
2) So, secondly, the argument reduces to either of the following options:
a) We arbitrarily attempt to maintain the purchasing power of previously issued fiat currency (liquidity units), and in the process, progressively deprive an increasingly complex economy of both relative liquidity AND return-on-coordination [i.e., pay the fiat interest by draining private savings of previously issue currency; even though population/capabilities/transaction-rates are all increasing]. [Even fools don’t want that, when faced with a choice. Only pure sociopaths do.]
b) Instead, enlarge the fiat currency base [the unit of liquidity] with expanded issuance (public spending), thereby diluting the absolute buying power of yesterday’s saved liquidity units. Why? In order to always ensure enough liquidity to rapidly explore the expanding options of tomorrow’s return-on-coordination – generated by more people with more capabilities.
That, in a nutshell, is the “SOCIAL-SPECIES DILEMMA” faced by every culture issuing a sovereign, fiat currency. Evolve and stay in the adaptive race, by organizing to manage transaction liquidity on a larger scale … or … become a has been culture, and become either extinct or a domesticated lunch source for some other, more rapidly adapting species – i.e., one continually optimizing it’s liquidity in order to explore expanding options faster than your culture does.
“People who save excessively, i.e., hoard fiat, are hoarding today’s output and thereby depriving their grandchildren of expanded options.”
People who save excessively, i.e., hoard fiat, are hoarding today’s output and thereby depriving their grandchildren of expanded options.
Our grandchildren’s options are reduced without our full investment in generating those options. Our Output Gap = our grandchildren’s Options Gap, and the relation is not linear, but exponential.
If our output gap is “j”, our grandchildren’s options gap is j(e), i.e., “j” to some unpredictable exponential “e.”
That’s how evolution has worked since the dawn of time. We invest and die so that our descendants can be far more than we were. It’s called sexual recombination, or cultural recombination, or – in general form – Options Recombination (see the “Traveling Entrepreneurs Task“).
This all follows from the simple, bottom-up dynamics of organized systems.
“In all complex systems, the highest cost, by far, is the cost of coordination.” – Walter Shewhart
This has an inescapable corollary:
“In all complex systems, the highest return, by far, is the return on coordination.”
The approach used here involves only very elementary concepts from biological, general systems, and military disciplines. Amazingly, however, the perennially dominant impact of coordination – long recognized in other fields – is not formally utilized whatsoever in orthodox economics, let alone recognized as absolutely dominant. There is clearly a tremendous need for more coordination across multiple, already long-existing disciplines.
“In all complex systems, the highest return, by far, is the return on coordination.”
Finally I want to give thanks to Warren Mosler, whose work has allowed cultural systems concepts to be translated to both economics jargon and banking operations. From Mosler’s work alone, and now also from a systems perspective, it is clear that the prevailing paradigms taught in orthodox economics are overly simplistic, and simply cannot scale as is. Data and/or theory are meaningless without context. Analogously, economics as a discipline is meaningless if not continuously integrated with a thorough understanding of both cultural systems operations AND actual banking operations.
This is a newly editted version an article first published 16 December 2012.
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