
Why No Jobs - stuntgoat
http://www.aaronsw.com/weblog/whynojobs
======
potatolicious
> _"Mr. Bernanke has a lot of money, as do the other bankers on the committee
> and the people who selected them. So they’ve decided to let millions and
> millions of people be unemployed and the rest of us experience the resulting
> recession rather than risk the chance that some of their money might be
> worth a little less."_

Okay, I was with you until this part - that's a pretty serious claim to make
without any substantiating evidence, or even something that _kind of_ looks
like evidence.

This seems like a gross oversimplification of a complex problem to me, and
like most other gross oversimplifications of the recession, seems to just pin
the blame on "greedy bankers".

~~~
CoreDumpling
I agree. I "work for a living" (whatever that means, though in the context
used here it's as opposed to being a "greedy banker"), and I can sympathize
with the plight of the unemployed, but I've also made sure I had sufficient
savings as a rainy day fund and am also prepared to reduce my living expenses
if necessary.

I think that I have every reason to be concerned that my little nest egg might
be devalued. More apropos to the community here, this could also mean a
shorter runway for a bootstrapped startup; I don't see how founders would be
pleased by such a move.

~~~
potatolicious
More relevant to the general population: when your nest egg's value is
anything but safe, you are going to spend your money as soon as you get it -
this has more ill effects than I can enumerate

This reminds me of my grandfather's stories during the Chinese Civil War (or
shortly after the capitulation of the Nationalists anyway), where he'd get his
pay and _immediately_ bike at lightning speed to the market to trade it for
sustenance.

Of course, the only thing that fixed that was a complete currency reset:

<http://en.wikipedia.org/wiki/New_Taiwan_dollar>

I'm not sure if the US would really be better off with that.

~~~
fnid2
The same thing happened in Argentina and the same thing _could_ happen in the
U.S. Countless fiat currencies in history have experienced the same fate. The
only solution I have ever seen in my research is to return to a commodity
backed currency.

If there are other solutions, I don't know of them, but would like to.

~~~
cynicalkane
Currencies backed by anything are a _terrible_ idea. Most economists now
believe that deflation caused by a gold-backed currency was one of the primary
causes of the Great Depression. Imagine how much worse it will be with, say,
an oil-backed currency. What would 2007 have done to our economy?

Central fiat banking is the best known solution to the currency problem. This
solution gets hated on by a lot of people who don't know any better, but think
they do. The central requirement is that the currency-makers be independent of
just about everyone, so that nobody can debase the integrity of the currency
for political reasons. This angers everyone who thinks they know better than
the central bank, but the anger of the average anti-establishment type is
fickle and transient. It also angers the politicans, who are more dangerous--
the examples of Argentina and Taiwan given here demonstrate not the dangers of
fiat currencies, but rather that any currency should be kept far, far away
from politicians.

~~~
Nwallins
> _The central requirement is that the currency-makers be independent of just
> about everyone_

Thus ignoring our entire system of checks and balances. Do you not see the
danger, here?

> _This angers everyone who thinks they know better than the central bank_

AKA, every market participant.

> _but rather that any currency should be kept far, far away from
> politicians._

In what sense are central bankers _not_ politicians? They are not elected,
that's for sure. However, they exercise a large amount of control over our
economy and very much influence official political action. In a sense, they
are very much a separate executive branch of our political system.

~~~
cynicalkane
There is no pre-existing "system of checks and balances" when it comes to
banking. But let's pretend there is.

As an analogy, consider that we have managed to get on with a politically
independent Supreme Court, with their least proud moment (Dred Scott) being
when they decided to ignore their charter and bow to the will of the people.

I have no problem trusting independent bodies with things, so long as they are
well-chosen and truly independent. History shows that this is a much better
idea then trusting either the econo-politically elite or the _demos_.

~~~
Nwallins
> _I have no problem trusting independent bodies with things, so long as they
> are well-chosen and truly independent._

Right, and a well-chosen king rules better than a representative democracy.
The problem is, how do we choose a king well? Likewise, how do we guarantee
the Fed is well chosen and _truly_ independent? I submit that we can't.

> _History shows that this is a much better idea then trusting either the
> econo-politically elite or the demos._

Care to elaborate?

------
ankeshk
The article makes wrong conclusions.

Money doesn't run the economy. Confidence does. Economy is and has always been
a confidence game.

If people in the baby-sitting co-op are confident to find / earn more scrips
in the future, they will spend their scrip today - even if its their last
remaining scrip. But if they have no confidence of earning a scrip in the
future, they will save it.

But if everyone starts saving the scrip, exchange doesn't happen. And economy
suffers. And because the economy suffers, people save more scrips. And it
creates a downward spiral loop.

On the other hand - if everyone gets over-confident and starts spending scrips
they don't have, we see a bubble and then a bubble-burst. Which leads to some
very bad consequences too.

So the trick has always been: make sure the people remain confident about the
future. But that they don't become over-confident.

------
philk
Keeping inflation under control isn't just something done to protect "wealthy
bankers". The stability of the financial system as a whole is predicated upon
the fact that money that I earn today will be worth something tomorrow.

~~~
codexon
_The stability of the financial system as a whole is predicated upon the fact
that money that I earn today will be worth something tomorrow._

The main purpose of currency is not the eternal accumulation of wealth. It is
for liquidity: making bartering easier. If you want long-term stability, you
can invest in gold or bonds.

The reason why the US has planned inflation is to maintain liquidity when
productivity rises or currency becomes horded. Economists such as Bernanke
have learned from the Great Depression that rising deflation with the same
productivity results in spiraling unemployment:

 _...a town full of shoe factories that closed during the Depression, leaving
the community so poor that its children went barefoot. "I kept asking, Why
didn't they just open the factories and make the kids shoes?"_

The reason is because companies know that consumers do not have money to spend
so they fire people to preserve their appreciating currency. By doing nothing,
these companies gain wealth while children walk without shoes.

From a purely capitalist view, these companies have the right to do so. But
would you really still hold that belief if all the farms shut down in this
manner?

~~~
philk
I'm advocating keeping inflation under control, not deflation. These are two
entirely different things.

~~~
codexon
If you don't inflate the currency to a certain level when productivity
increases due to technology or population growth (such as right now), it may
result in a deflationary spiral.

As Aaron said, it is a personal opinion of how much inflation you prefer.

Do you prefer a relatively high inflation because you want to be employed? Or
do you want a relatively low one so your assets appreciate or keep their
value?

------
byrneseyeview
This is basically the same article Aaron wrote early last year:

<http://www.aaronsw.com/weblog/depressions>

The difference is that now he says it's all because Ben Bernanke wants to, um,
profit on his dollar-denominated holdings. Which is sort of like claiming that
the CEO of Exxon really believes in global warming, but he wants his next
beach vacation to be .1 degrees warmer.

------
TomOfTTB
The problem I have is his basic premise is flawed. He's using the dropping of
the Gold Standard as proof that pumping money into the economy will create new
jobs. But if you look at unemployment after 1933 (<http://bit.ly/9k4xVu>) you
see it did dip but then started to rise again. Because eventually printing
that money devalued the dollar.

See the inflation charts here: <http://bit.ly/aA5MXb>

So Roosevelt's plan failed (and it did fail) because the dollar's value
dropped. So while more money was getting pumped in to the economy that was
being negated by the assets of U.S. companies dropping in value. That drop
caused business owners to stop hiring again.

My understanding of the Obama administration's basic plan is to pump money
into the economy while trying to control inflation. That way companies will
get the benefit of the Government's money without having their own assets
devalued (and Ideally that will cause them to start hiring again)

~~~
codexon
It is also flawed for you to conclude that dropping the gold standard was the
reason behind the unemployment. There were many things happening that could
also have contributed to it.

Here is a more complete graph of unemployment during the Great Depression
where you will notice the unemployment levels never reaching the peak, and
dropping back down with Roosevelt enacting even more policies and spending
bills.

[http://www.inewscatcher.com/timages/50154f373744ae8603a61449...](http://www.inewscatcher.com/timages/50154f373744ae8603a614495378049c.jpg)

------
Dlev_
...and this is why programmers should just program, vs. spreading some
unsupported gutty-feely conjeture of an economic problem way too complex.
Crap... anybody feels they can write about economy after misreading a couple
lousy quotes from a guy who actively proposes inflation to any bleeping crisis
around the globe.

~~~
scotty79
Are you saying that grease monkeys should be rarely seen, never heard, should
stick to their crap and let real specialist to handle the money? After all
they do so well.

~~~
mortenjorck
Would you like to see a code check-in by Paul Krugman?

There's nothing wrong with expanding your horizons (I'm an armchair economist
as well) but trying to write critically on a subject you don't really have the
background to do so on is counterproductive.

~~~
scotty79
> Would you like to see a code check-in by Paul Krugman? I'd gladly welcomed
> code check-in from 8 year old if it nailed the problem.

------
tewks
The anecdote about the babysitters and the lesson he's explaining is lifted
directly from Krugman's _Depression Economics_.

He mentions Krugman briefly later, in support of his argument, but doesn't
properly cite the material in question or mention the fact that Krugman is in
fact the one making the argument...

------
Tichy
I wish there was more than that baby-sitting co-op to support those ideas. One
story doesn't make a proof. Krugman brings it up all the time - so the hopes
of the nation apparently rest on a single baby-sitting co-op.

It's been too long since I thought about it, but back then I felt there were
some aspects missing from the story. Must think about it again, but overall,
it is a very limited experiment, hardly the same as a full economy.

Also, doesn't the co-op story show that people can also create their own
money? If lack of money was the problem, why don't they just exchange services
and products (I mow your lawn and you clean my car)? Money is just a tool to
make exchanges more efficient, but it's not that without money they become
impossible.

Of course, it is always appealing to blame everything on some rich elite.

~~~
davidw
> I wish there was more than that baby-sitting co-op to support those ideas

There are people who dedicate their careers to studying this stuff... and they
have better examples. That's just a simplified example used to communicate the
idea.

> why don't they just exchange services and products

What money makes possible is more complex exchanges. Say, I make a web site
for some guy, who gives a book to some other guy, who gives some steaks to
another guy, who gives some pasta sauce to another guy, who gives some milk to
me.

Without money, complex interactions necessary for a modern economy wouldn't be
possible.

> Of course, it is always appealing to blame everything on some rich elite.

Actual economists generally don't do that. I wish if people wanted to post
economics articles, they'd 1) do so on reddit, but if they really can't
contain themselves, that at least they'd 2) post actual papers by real
economists (and not just their opinion pieces) or something more than
politicized handwaving.

~~~
Tichy
"There are people who dedicate their careers to studying this stuff... and
they have better examples."

Yeah, but last I heard, not all of them agree with Keynes. Also, please point
to some examples. I have heard Krugman repeat that baby-co-op several times
now. You'd think he'd provide some other examples occasionally if they are so
abundant.

I know that money is a very useful tool, but it still seems to me that if only
money was the problem, people could find workarounds. They could create their
own money, if the state did not provide enough. The baby co-op did just that,
it seems.

It just takes a little more than one baby co-op to convince me that
availability of money is the only factor that makes an economy work.

It is however a very appealing theory to governments, because it justifies
them printing more money. And as we see, it appeals to conspiracy
theoreticians, too.

My own view (without academic seal of approval) is that efficiency is the main
factor that determines our well-being.

~~~
davidw
> My own view (without academic seal of approval) is that efficiency is the
> main factor that determines our well-being.

Well, "productivity" for efficiency, but yes, you're essentially correct. I
wasn't trying to defend Aaron's post, and indeed, economists do differ,
widely, on various things. It's a relatively recent field, one where there are
lots of messy human factors, and of course it's difficult to do many
experiments.

I'd rather not see it here, though, as it usually rapidly devolves into
essentially political discussions.

------
coffeemug
I know I only see a small part of a whole and I lack full perspective on
things, but from where I'm standing the biggest challenge of _every_
funded/profitable company I know is hiring good people fast enough. All the
good people I know (even in non-tech fields, including finance and real
estate) are employed. Even most pretty marginal people I know are employed (at
salaries they aren't happy with, but certainly nothing unbearable). Perhaps
the people that are losing jobs weren't that good at them to begin with?

I realize that not everyone can be super-professional at what they do, and
that's fine. But in my social circle (which includes all kinds of people from
no skills/no education immigrants to highly specialized professionals in a
variety of locations throughout the U.S.), nobody is _really_ struggling. So
what gives?

~~~
orangecat
That's actually a common effect of a recession. People with halfway decent
jobs are much more likely to stay put, because they don't want to take the
risk of switching to a new company and having it fail soon after.

------
tsally
I was having a discussion with my friend today on related topics and I
couldn't figure out the answer to this question: where does the demand for
talent in the finance industry come from? On a basic level, banks exist to
facilitate loans. Someone with money gives it to the bank. The bank loans it
out to someone who pays it back plus interest over a period of time. At the
end, the bank and the original investor get some return on his/her money. The
hardest part about this chain on events is picking people who wont default on
their loans.

But clearly the demand for talent in banking is much higher than that. These
people get paid extraordinary amounts of money. So where is that demand coming
from? What service is being provided by banks that warrants the compensation?

~~~
barry-cotter
Investment Banking has sky high salaries, not banking in general. That's
mostly Mergers & Acquisitions, IPOs and Trading. The reason trading is so
lucrative is obvious, if someone can make lots of money for you, they can do
it for anybody so you haver tyo pay them lots to do it for you.

For M&A and IPOs it's also relatively simple; the differences in the amount of
money you get can relatively easily be 20% _or more_ depending on who's
representing you. These are complicated transactions, you need a lot of
expertise to do them, and you need a sales team in place to sell it, and an
organisation capable of doing the research to drum up the deals. When you're
dealing with huge amounts of money anyway and the top guys are vastly better
than the mid market they'll be able to demand $BIGNUM because they're judges
to be worth it.

~~~
yummyfajitas
It's also because the stakes are so high. Suppose the #1 guy is only 2% better
than the #2 guy.

2% of $100 million is a lot. If you need to pay the #1 guy an extra
$100,000/year to keep him, it's well worth it.

------
po
An interesting atlantic article on a similar topic:

[http://www.theatlantic.com/magazine/archive/2010/04/my-
infla...](http://www.theatlantic.com/magazine/archive/2010/04/my-inflation-
nightmare/7995)

This writer also comes to the conclusion that inflation might be the way out.

------
djcapelis
I thought this was an excellent explanation, but I really don't appreciate the
impeachment of the Fed. The author starts with a very nice explanation, but
then goes to an extreme simplification of the complex process of balancing
inflationary pressure with the rest of the economy. It's certainly fair to
criticize the Fed, but to present their objectives as one-sided where
inflation is always good is as equally foolish as the people calling for the
gold standard again.

Frankly the Fed is probably only doing their job if everyone is angry at them.
Which seems to be the case, so I tend to think they're probably making a
decent trade-off at this point, as hard as it is for both sides to stomach.

------
cousin_it
In Aaron's very first example with scrip, people would just start babysitting
for _half_ a piece. "Not enough dollars" you say?

~~~
3pt14159
Came here to say that. The fact that the script was called "1 hr slots"
distorts the mental exercise, and deceitfully leads the reader to a logical
outcome that would not be the case.

------
ckuehne
See <http://mises.org/Community/forums/t/7037.aspx> for a rebuttal of the baby
sitting co-op story.

~~~
dhume
Their attempts to reconcile their love of the gold standard with their
kvetching about price fixing are hilarious.

------
ars
If what he says is true, then the U.S. can print lots of money, pay off the
national debt, and create jobs.

Sounds like a win win.

Probably it isn't though.

~~~
fexl
Right, that would destroy the value of the property people have already earned
and somehow managed to keep. That would be wrong.

If you want jobs, let people accumulate capital and invest it how they like.

------
wdewind
This just dances around the edges of the key point: the gap between rich and
poor. It's not that there isn't ENOUGH money, it's WHERE the money is. Of
course printing new money, and redistributing actual physical units of money
are kind of similar things to do (they both equate to wealth redistribution),
so while I agree with a lot of what Aaron says, he's only CLOSE to the issue
at hand, not actually hitting it on the head.

If you want a TLDR version of the economic crisis, like Aaron attempts here,
you really want to just look at the increasing divide between rich and poor in
the country (aka the unbalanced distribution of resources = unbalanced
distribution of power = system susceptible to corruption, greed etc =
incentives lined up to benefit small portions of society not large = economic
failure.)

~~~
gaius
I can't believe I'm reading this here of all places.

<http://www.paulgraham.com/gap.html>

~~~
wdewind
I'm not talking about bankers or CEOs being paid a lot of money and whether or
not it's too much. The argument there isn't about whether or not their actions
generate wealth/value, it's just about how much. A basketball player doesn't
take wealth away from anyone, he just prevents others from earning it in his
spot.

What greatly exacerbated the economic crisis were decisions made for small
amounts of people wall street that impacted large amounts of people
everywhere. Many of these decisions were corrupt (ie they did more than
prevent others from making wealth, they actually took it out of their
pockets), but even in the times when they could be simply considered
"competitive," the ability to make such decisions that impact such large
portions of the population should be limited greatly. This is a systemic
problem, not a person problem.

The quick response to that one is that you need a system of incentives that
get people to work hard enough, and part of that system is having positions
like that where people can make decisions like that. I disagree, and actually
take something like the NBA as an example: basketball players accumulate great
deals of wealth (monetary and otherwise), enough so to keep people training at
the peak of their abilities. Yet I can't remember the last time someone
accused Michael Jordan of destroying jobs or the economy...

------
nkassis
It seems like there is a lot of contradiction in how the Fed/Gov are trying to
restore the Banking system. On the one side they are telling banks to keep
more cash in reserve. (This is a worldwide phenomena). On the other side they
are asking them to ease credit a complete contradiction to keeping more
reserve. At the moment, banks are building up stock with cheap money from the
Fed (at least that what I think they are doing) and credit should ease once
they do so (as I believe it is doing currently). Inflation in this scheme
would not be a factor because the money is being soaked up by banks as
reserve.

At least this is what I'm getting from all the CNBC/Bloomberg watching ;p

~~~
lallysingh
Given credit isn't the only thing that affects the reserve amount. For
example, the bank buying securities themselves.

------
garply
"It all worked great for a while, until one day they found they had too few
pieces of scrip. Every couple had only a couple hours left and, having so
little, they didn’t want to waste it."

Wait... where did the old pieces of scrip go?

~~~
potatolicious
Mr. and Mrs. Jones from down the street were saving them all in the hopes of
getting rid of the kids for good?

------
dbz
This would have been an amazing read if the author had included something more
than a few quotes. Charts and Graphs and Statistics and Links Full of
Research. I don't have the time to check up on this information myself (hence
reading the article), but if the author had backed up all of his _crazy_
theories with tangible evidence- this article would have been amazing.

So to answer your question, Mr. Author, I will listen to you when you back up
what you say with something tangible I can hold onto.

------
johngalt
What substantiative actions are being taken by the reserve? To me it appears
they are gunning for inflation with the low rates.

If I have $billions then I can invest my money in a way that hedges against
inflation. Conversely if I make $20k/year I can't insist that my employer pay
me in a fixed number of long oil positions. So it's not true that inflation
always hurts the bourgeoisie and helps the proletariat.

It is true that inflation hurts a lender and helps a debtor. If inflation is
at 10% and your mortgage at 6% then you're effectively making a 4% return on
debt. Conversely the bank is losing money because the money repaid is worth so
much less than the money lent. _Bonus points for anyone that figures out why
the banks aren't lending_

As for Bernanke/cronies motivations; the federal government would like
inflation to be as high as possible without risking collapse. So if "money for
their masters" was the Fed's goal they will keep gunning for sustainable
inflation. Bernanke/cronies can hedge against it, and the largest debtor in
the world would prefer to pay a low interest rate.

~~~
mmt
_Conversely the bank is losing money because the money repaid is worth so much
less than the money lent. Bonus points for anyone that figures out why the
banks aren't lending_

Except that the bank isn't really lending its own money. It lends its
depositors' money, amplified through fractional reserve banking. They can also
borrow from the Fed, making their own bundle on inflation, as a debtor.

------
mjw
For one thing, he completely ignores the fact that the US economy doesn't
exist in a vacuum. Inflation can have a big affect on exchange rates,
importers and exporters, the attitude of people like China to all the USD debt
they own, etc etc.

------
scotty79
I think there is some good insights in this. As I see it:

FED + Banks is a system of issuing money. As economy grows it needs more
money. FED decides how much money is needed and banks determine who needs it
and gives it to them (getting healthy profit if they were right).

Banks found a way to circumvent FED limits on making money. They made much
more money then the FED intending them to make. That money was pushed mostly
to real estate market driving prices of houses up so they became completely
disassociated with their real value that they may present to anyone. It was
kind of spotlight hyperinflation. Each dollar was worth lower and lower
fraction of average home. Money was seeping to the rest of the economy but
since due to technical advancements real value of economy was growing probably
faster then FED expected that inflation was not noticeable in other markets.

When credit is paid back the money that was created when credit was given is
destroyed. When situation is stable and credits are paid back at predictable
rate then banks just give new credit in place of old ones if they are needed
and allowed by FED and everything goes just fine.

But when credit defaults money all borrowed money not paid back yet is also
destroyed. If huge quantity of credit default at once huge quantity of money
is destroyed. What is more it's money that belongs to bank is seriously
crippled by this. Not only he didn't earned interest rate but also he has less
money to give new credits and create more money to profit out of. Defaulting
on massive scale is something that current system of issuing money is not
protected against.

I'm not entirely sure what happens if bank needs to destroy more money for
defaulting credits than it has. Bank obviously goes broke but is the rest of
the money still destroyed or not?

Since a lot of money was destroyed there is possibility that there is too
little money now. As far as I know there really are no good ways to estimate
how much money is needed (FED and equivalents in other countries do it by more
or less educated guess). Maybe issuing more money could help, maybe that is
not needed. It's not that obvious as post author has stated but it may be
worth a try.

Also grudge about wealthy is not very polite but it might be true that they
fear inflation more then they should because of their wealth.

Disclaimer: By 'creating money' I don't mean literally printing it, just
borrowing many times over the money that bank has (or borrowed). By destroying
money I don't mean burning it but just owing people who deposited money in the
bank and not having cash to give them back their money.

------
known
Wondering what % of Americans invest their money via stock markets?

------
CulturalNgineer
Great Post!

He's on to vital fundamentals.

It's helpful to look at civilizations as products of 'social energy'...
countless decisions by individuals and groups. (A decision is an idea + an
action).

Money and credit are very imperfect technologies for the storage and
allocation of this 'social energy' with an inherent bias in favor of any with
the power to create it.

So, since this 'creator' bias is inevitable the solution has to lie in
democratizing (with important checks and balances) the process. This inherent
bias also makes the Fed’s claim of independence ridiculous on its face and is
a core problem with the monopoly of central banking. (This doesn’t suggest its
elimination, only elimination of its monopoly).

After all… who has the right to create and than allocate YOUR ’social energy’
without your input?

That’s worse than taxation without representation… that’s potentially multi-
generational enslavement without having an ounce of input into that allocation
of your life’s energy.

The thought process that rationalizes it for the ‘credit creator’ and those
most closely benefitting is tied to a problem of scaling biological altruism
but that’s a separate essay.

I believe this inherent bias may suggest that more than one type of credit
creation may be desirable. For example local currencies geared to local
products and services to function alongside one or more global currencies… in
an attempt to overcome a ‘proximity’ bias which goes along with a social bias.

This approach can encourage asset-based-community-development and economic and
financial resiliency while preserving the advantages of global trade and
markets as well.

Again, I’m not an economist but it seems to me these are ideas worth
investigating.

A brief post on some of this here:

On Social Energy, Enterprise & Expanding the Technology of Money

[http://culturalengineer.blogspot.com/2010/01/on-social-
energ...](http://culturalengineer.blogspot.com/2010/01/on-social-energy-
enterprise-expanding.html)

I also believe the Individually-controlled / Commons-dedicated Account
facilitating the microtransaction in Commons focussed activities (politics and
charity) is an essential piece of this puzzle.

Opinion and influence are also aspects of ’social energy’ which money
powerfully conveys(though we might wish it weren’t so). Current money
technology inhibits the free flow and networking of this energy which distorts
opinion markets.

And, in fact, tends to further entrench the problem.

------
swah
Youtube: "Quants: The Alchemists of Wall Street."

