1. Primitive government finance.

Government (its treasury) pays its bills with printed certificates (called currency) These certificates are promissory notes. The promise is to redeem them – to accept them in payment of any obligation to the government. For example, it promises to accept these same notes in payment of tax obligations.

A balanced budget is when the Government collects in taxes as much as it spends. Naturally the Government is loathe to collect taxes because tax collection makes the Government unpopular. So it tends simply to print whatever currency it needs to pay its bills. Doing this causes the currency to lose value. When the supply of circulating currency rises, each unit is worth less in goods or services. The steady loss of currency value is called inflation.

2. Modern government finance.

In modern times the printing of money is not something that the government does directly. Until a Central Bank was created in the U.S. most any bank at all issued currency. They had ‘bank notes’ printed. Each bank issued its own notes. To ‘issue’ means to ‘pay with’. They ‘paid’ (made their loans, bought supplies, paid employees) with their bank notes. These were promissory notes; promises to pay on demand. To pay what? Answer: specie or gold, but more importantly, the promise was to redeem the note. To redeem the note means to accept it in payment of any debt to the bank.

These bank notes functioned as money in the community. They were generally accepted in payment for goods or services since the holder could, in turn, use the bank notes to pay his or her own bills. The notes of different banks were exchangable via exhange rates between them. Like exchange rates between different national currencies today.

Currently the U.S. Central Bank – the Federal Reserve – is the only bank in the U.S. allowed to issue bank notes. And these are used for currency. The Government’s Treasury pays all the Government’s bills. It pays the salaries of officials. It pays the debt service. It pays for the military etc. All with the bank notes issued by the Federal Reserve.

It acquires these bank notes in two ways. It collects taxes which are paid with these bank notes. And, when need arises, it solicits loans. It issues (sells) long term promissory notes called bonds. Bonds are promissory notes that need be repaid only many years after their sale. They are purchased by investors and the money paid for them – in bank notes – goes into the Treasury. The Treasury must pay the interest that is due each bondholder and it must eventually ‘redeem’ the bond. i.e. repay the loan that the bond represents. The bondholder buys the bond for its income (the interest payments) and because a U.S. Government Bond is considered to be an essentially risk free investment.

The Federal Reserve Bank buys these bonds on the open market with ‘bank notes’ i.e. with printed paper certificates called Federal Reserve notes. The idea: Every bank note issued is ‘backed’ by a valuable asset: a bond of the U.S. Government (assumed to be as good as gold!).

Click on the go/reset button in the Money Creation motion graphic above to see the process visually. In that graphic each column pair represents a balance sheet. Liquid assets are green. Illiquid assets are brown. Liabilities are red. And net worth is blue. See  http://chesters.org/marvin/economations/ for further elucidation.

The modern method of ‘printing money’ to pay its bills is this: The Government Treasury issues (i.e. sells) bonds which the Central Bank (the Fed) then buys with ‘bank notes’ that it prints. The law says that the government may not exceed the debt allowed by Congress. So the debt ceiling must be raised periodically to permit the Treasury to sell bonds in order to have money printed by the Federal Reserve to pay its debts.

But if you buy 10 shares of Wal-Mart stock at $56 per share you pay $560. Nothing at all is taken by government! There is no sales tax on buying stocks or bonds. Too bad you can’t wear or eat stock.

Now here is the remarkable fact: If there were a 9% U.S. Government sales tax on the sale of securities (stocks or bonds) the amount of revenue collected would entirely wipe out the Federal Deficit and even leave some surplus!

The web site of the New York Stock Exchange (nyse.com) lists the value of securities traded each day. Extrapolating for a 250 day year of trading yields an amount of about $18 trillion in stock sales per year. The US Government Budget, Summary, Table S-1 (www.gpoaccess.gov/usbudget) says the deficit for the year 2010 was $1.6 trillion.

So a 9% tax on security sales (otherwise known as stock trades) would completely eliminate the deficit!
(9% × $18 trillion > $1.6 trillion)

When a ‘sales’ tax is imposed by the federal government it goes by the name excise tax rather than sales tax.  The euphemism ‘security trade’ actually means ‘sale’. Somebody sells a stock or bond to somebody else who buys it. And, unless it’s a rare initial public offering (IPO), the sale has no effect whatever on the coffers of the company being ‘traded’. It’s just an exchange of ownership. The ten shares of Wal-Mart stock that the seller sells to you means that he relinquishes his ownership stake to you. Now you, instead of the seller, own one 400 millionth of the company – 10 shares worth. It’s like buying a used car from someone. He owned it before. You own it afterward. No money goes to the manufacturer. But you must pay a tax on the car ‘trade’! The stock trade is tax free.

There’s an important economic difference between taxing the sale of consumer goods and taxing the sale of securities. Taxing consumer goods hurts prosperity. Taxing stock sales doesn’t. Making, transporting and selling consumer goods employs people. Trade in goods and services adds to general prosperity. It keeps people working and gives them purchasing power. So a sales tax on consumer goods hurts prosperity. Every fiscal conservative knows this.

But a sales tax on stock market speculation – the buying and selling of stocks – doesn’t directly affect general prosperity. Stock trades are exchanges of ownership. Exchanges of ownership don’t create jobs. Consumer goods are not affected. So our tax system encourages speculation and discourages the prosperity of job seekers.

Things not taxed cost less. Low taxes encourage commerce. The tax system makes the commerce of stock market sales easier and the commerce in manufactured goods harder. But the manufacture of goods employs people. It contributes to prosperity. So prosperity is handicapped with taxes. While speculation is encouraged by being tax free.

Perhaps its time to discourage stock market speculation and to tax it.

For those who may want to bring this idea to their representatives in Congress and in the Senate take note that, using your zip code, you may look up your representative and senators at:
http://www.govtrack.us/congress/findyourreps.xpd

For sending email to Chairman Max Baucus of the US Senate Committee on Finance go to http://baucus.senate.gov/?p=contact

Email may be sent to Senator Barbara Boxer at:

http://boxer.senate.gov/en/contact/policycomments.cfm. Or on twitter @senatorboxer

Email may be sent to Senator Dianne Feinstein at:
http://feinstein.senate.gov/public/index.cfm?FuseAction=ContactUs.EmailMe

Email may be sent to Congressman Sam Farr at:
https://forms.house.gov/farr/webforms/issue_subscribe.html

Austerity is undesirable. Everyone wants prosperity. Austerity brings violence and unrest.

What is prosperity?

Prosperity is the ability to buy what you need – or what you may not need.

It is everyones desire – this ability to buy what you need.

When there is much buying and selling we have prosperity. Those are times when people are employed. They sell their time and buy goods and services with their earnings. Thus causing other people to be employed and, themselves, to buy things. Prosperity is connected to economic activity; the vigorous exchange of goods and services.

To be able to buy things is the ultimate measure of prosperity. So to ask for prosperity is to ask for economic activity.

Of course, the benefits of economic activity may not fall equally on all, but those who prosper do so from economic activity. Governments try to create prosperity. Adversity drives Governments from office.

Fundamental equation:

spending minus revenue = deficit = must be borrowed

Any government – municipal, national – is an economic unit. During the year it spends an amount called ‘spending’. The taxes and the fees it collects are its ‘revenue’. The difference between these two is called the ‘deficit’. A negative deficit is called a surplus.

The deficit is the amount of money that must be borrowed in order for the government to pay its spending bills for that year.

Government borrowing takes the form of bonds. These are promissory notes sold on the open market. In the U.S. all such borrowing is done only with the consent of the electorate. It is we who permit government to borrow; either directly, by vote on a bond issue, or indirectly as when Congress raises the Debt Limit.

Fact: Spending increases prosperity.

Government spending increases economic activity just as the spending on goods and services of any other economic unit does. The government creates jobs via the contracts it lets out to private contractors. Because the government purchases them, goods and services are produced. People are employed. This increases their ability to buy. Prosperity is fostered by government spending. Thus spending cuts decrease prosperity.

Fact: Deficits destroy prosperity – eventually.

A continuing deficit means more borrowing each year. What is paid as interest on past debt – the debt burden – mounts. The mounting debt burden makes lenders, from whom the deficit money is borrowed, wary. They stop lending. Not being able to borrow, the government will not be able to pay its bills. Thus will its spending be forcefully curtailed and austerity ensue.

Continued prosperity demands:

since spending increases prosperity,
1. that spending not be cut and

since deficits destroy prosperity,
2. that the deficit be erased

Is continued prosperity then possible?

The answer requires attention to the third term of the Fundamental Equation: revenue. According to that equation the deficit can, indeed, be erased and spending not be cut. It’s possible if revenue is sufficiently increased. i.e. if new taxes are imposed to furnish that increased revenue.

Suspect premise: Taxes decrease prosperity.

This premise is widely held. It’s expressed in the slogan, “No new taxes”. The rationale for this premise is simple: A tax is money removed from earnings. I’m left with less to buy with. My prosperity is decreased.

That’s the rationale.

My prosperity is, indeed, decreased but the general prosperity is not decreased! The government spends that money on goods and services, albeit not the ones I might have chosen to spend my money on. So general economic activity is maintained and thus so is general prosperity.

More interesting is this: When I am taxed more, I buy less. Not everyone, who is taxed more, buys less. Some, when taxed more, simply own less. Their buying continues unabated. These are people most of whose income feeds a portfolio of investments – money itself earning money. Their income is sufficiently large that spending on goods and services is little affected by taxes. The wealthy don’t buy less when they are taxed more.

So increasing revenue by taxing investment – capital gains – far from decreasing prosperity, actually contributes to it! Money that the tax payer didn’t spend on goods and services is spent on goods and services by the Government. Taxing capital gains augments economic activity. It swells general prosperity.

So increasing taxes (government revenue) can both erase the deficit and preserve general prosperity.

It is best done by taxing earnings that are not directly spent on goods and services. Taxing portfolios of ownership holdings. Taxing capital gains. The current 15% capital gains tax should be raised to 85%. Taxing wealth. What is required is a severe skewing of the tax schedule. Tax those who can best afford to pay taxes; those who use only little of their income for spending.

The wise among the wealthy will know that this is the best way to preserve their wealth against the threat of anarchy that public austerity always poses. But wealthy or not, to save prosperity we must tax ourselves.

I’ve plotted some of the data in the graph.

The horizontal axis covers the years from 1900 to 2007. Where data was available, the blue points display the estimated number of people in the world in billions. (The number 4 on the vertical axis means a population of 4 billion people)

The red points represent the percentage increase in population per year as calculated from the blue population data. For the red data the numbers on the vertical axis mark the population increase in percentage points per year. (The same number 4 means, for this curve, a growth rate of 4%/year)

From data not plotted here it is clear that before 1900 the growth rate was always lower than 0.7%/yr and usually significantly lower. At the time of the Bubonic Plague in 1400 the human population growth rate was negative. In 1778, when Malthus published “On Population”  the growth rate was about 0.4 %/year.

So we see from the graph that the greatest percentage growth rate in the recorded history of humanity happened between the years 1963 and 1972! And that was about 2%/yr – a doubling time of 35 years.

The dip in the curve around 1960 is due entirely to the population drop of 10 million people in China. This was the time of the great famine caused by Mao Tse Dung’s “Great Leap Forward”.

Where do the numbers come from?

Happily google offers us a table of data gathered from many sources called Appendix: World Population Estimate Sets : 10,000 B.C. to 2007 A.D.. I don’t know to what this is an appendix but the offering is a precious one. All the sources are referenced for each entry in the table.

Another site for world population data where the references are provided is the table called Historical Estimates of World Population offered by the U.S. Census Bureau. My 1910 estimate comes from this site; the google one lacks this date.

Something called the HYDE database (History Database of the Global Environment) developed under the authority of the Netherlands Environmental Assessment Agency, is available at
http://www.pbl.nl/en/themasites/hyde/index.html
Unfortunately this site is not at all user-friendly. Getting data from this site is possible but painful.

The chain of yearly data between 1925 and 1939 comes from the published Yearbooks of the League of Nations. The chain of data from 1950 to the present comes from a table called “Total Midyear Population for the World: 1950-2050” offered as part of the U.S. Census Bureau’s International Data Base

What’s to love?

An equation is is a statement that says ‘this equals that’. It’s hard to imagine, from that raw and basic idea, that something called an equation could be of any use. Whether ‘this equals that’ or not seems a matter of little consequence!

But, in fact, we know that to state what things are equal can have powerful consequences.

Newton’s law – that the net force on something causes it to accelerate – is a matter of things being equal. Force = mass multiplied by acceleration. This law of nature governs an extraordinary panoply of phenomena: the solar system, the entire NASA program of space exploration, the working of engines, the nature of energy and thus of pressure and of temperature and thus our understanding of weather. It underlies thinking in engineering, geology, chemistry, biology, and, of course, physics. All from ‘this = that’.

That mass is a form of energy, the famous E = mc², is a statement about things being equal. It has had profound consequences.

In market shopping, the price per pound of potatoes multiplied by the number of pounds in the package equals the purchase price. This is a matter of things being equal. The computation is the key ingredient of household economics.

The invention of the equation is surely comparable, in impact, to the invention of the wheel. But, in what resides the power of such a simple construct – the saying of what equals what?

I imagine that the saying and writing of equations is the observable expression of the mechanism of understanding taking place unawares inside the brain. The brain constructs equations in order to function. Eventually, as the use of writing evolved, this internal process flowered into an external expression of itself.

Thus the matter of sameness – equality – must be at the basis of ‘understanding’. Perceiving ‘what equals what’ allows us to catalogue experience.

On the significance of the evident applicability of mathematics to the physical world, see Is Symmetry Identity? For the idea that the pursuit of understanding is a quest for sameness see Physics As Symmetry

The modern equals sign (=) dates from 1557 England. The man, famous for introducing it is Robert Recorde. Before that, the words ‘is equal to’ were used. So the idea of ‘equation’ far antecedes the equals sign.

In “Civilisation and its Discontents”, Freud says, “Culture has to call up every possible reinforcement in order to erect barriers against the aggressive instincts of men…Its ideal command to love one’s neighbor as oneself is really justified by the fact that nothing is so completely at variance with original human nature as this.” From a Buddhist perspective, nothing is so at variance with our original nature as the “aggressive instincts” Freud describes. In fact, aggression, hatred, and greed are seen as based in delusion and covering over our innate goodness.

‘Original human nature’, ‘innate goodness’. Is there meaning attached to these phrases?

How measure what is ‘human nature’? How can one know what is at the core of all human activity? Is there a single ‘nature’ which drives the behavior of all humans? Is there any empirical foundation for the idea that ‘aggressive instincts (are) original human nature’ or for the opposite view that ‘aggression, hatred, and greed are … covering over our innate goodness.’?

The idea of ‘innate goodness’ contradicts the evidence of our experience. Not all people are made of the same stuff – goodness. There are, indeed, among us people made of that stuff: precious caring souls entirely motivated by compassion. There are also warriors among us for whom compassion is a failing. There are angry people and merry people. There are those whose suffering warped their lives and others whose suffering enobled their lives. ‘Aggression, hatred and greed’ are the true characters of many. No innate benevolence is being masked.

Our species exhibits a cornucopia of behaviors. Their components are much too diverse to be assigned a simple scale of good or bad. Behavior reflects the unique bundle of biological process that makes up each human. Heart muscles differ. Brain chemistry differs. Experiences differ. … It is this variation that generates the plethora of behaviors we see.

The doctrine of ‘innate goodness’ is pleasanter to contemplate than that of ‘innate evil’ – the idea of original sin on which Christian churches are built. Pleasanter but not less primitive. They are both myth.

In our miraculous world even evils may serve the good. Greed is a major factor in growing the economy. Because there are thieves, murderers and terrorist warriors in the world we need our own warriors to defend us.

And who is to define ‘goodness’. Wars have been fought and atrocities committed in the name of ‘goodness’. In Pakistan the Taliban imposes goodness on the population. Sometimes by public floggings of ‘sinful’ women. Not all of us are in agreement on “goodness”.

So ‘original human nature’ and ‘innate goodness’ are, indeed, phrases to which no meaning is attached. They are child’s fairy tale words. They paint fantasy pictures.

Reality is more interesting. Recognizing reality can be marvellously beneficial. It dissolves the hidden self-righteousness in accusing others of “delusion … covering over … innate goodness.” One needn’t expect that aggressors will caste off delusion and come round. Instead we govern ourselves so as to accomodate the world’s variety. Learn to live with the lunatics. They will always be among us. Mold our institutions to accomodate vaste diversity while containing excess. There are mean spirited people and great spirited people. There are all manner of spirits among us. I don’t expect universal innate goodness to shine through very soon, the Buddha notwithstanding.

Fundamentally there is no point to being alive. People live. They don’t dwell on its pointlessness.

Most fabricate a meaning for existence. They manufacture a ‘point’:  to serve God, to make music, to create art, to succor the family, to attain high speeds, to wreak vengeance … To ‘do’ something or other. The ‘doing’ is sanctified by calling it ‘the meaning of life’. But on the cosmic scale of things none of these activities qualifies as ‘meaning of life’. They’re merely expressions of human enthusiasms. Subjective passions not ultimate insight.

A few accept that the phrase “the meaning of life” has no meaning. They are the ones who delight in pointlessness.

Meaninglessness has implications. One is that there is no God. I can’t prove it. Nor can I prove that there is no Santa Claus or tooth fairy. By the time of adolescence one accrues enough experience of life to relegate these concepts to charming myth. It is experience of life – awareness of natural process – that relegates God to myth.

Is existence due to will (the will of God)? If there were a God, is he interested in the trivial foibles of human affairs? These ideas are simply too primitive for a mature, reasonably educated person to embrace.

Medieval battles were preceded by fervent appeals of the combatants to God. Was the outcome determined by the appeals? Surely not. On earth, death is the release granted terrible suffering. Can there be an afterlife of interminable suffering from which not even death can offer relief? The alternative is an afterlife in which one floats around interminably happy in the presence of God.

These are such manifestly fairy tale notions that it is difficult to understand how functioning adults could believe them. But a large number evidently do believe them. And with fervor. Lives are molded by these convictions.

How charmingly diverse are the life forms among human convictions.

On my daily walk along Joy Road I pass many scenes. One of them is shown in the image. Another, further along the road, is policed by a black and white dog. My neighbor tells me he is a Border Collie. As I walk by he barks at me without stop as if to say, “If I weren’t on this chain I’d come at you and sever your foot from your leg.”

I, of course, am happy that the chain restrains his turf.

One day, as my walk brought me near, I could see this dog scampering around his usual territory. But, now, he was obviously free of the chain. I got worried and looked around for a stick to defend myself. Fido, oblivious, just cavorted merrily, snapping at flies, running frenetically here and there without a sound out of him. He stopped for a moment, looked at me, and then returned to his play. No barking. No attack. He had no interest in me!

And so I came to understand what Fido was saying when he barked at me.

“Hey you – anybody – come over here and get this chain off my neck.”

Of course any dog lover would assume this from the outset. Apparently I lacked the insights that dog lovers have. I have not paid attention to the language of animal behavior. It’s a failing.

RESTRAINT IS VALIANT

It takes valor to hold your tongue. The common view is that to do battle is valiant. But, in truth, to refrain from battle is valianter! The reward is the husbanding of precious life’s moments, as exemplified in the following story called “Righteous indignation is a temper tantrum.”

It’s Friday. Morning. The telephone rings. I answer it.

Caller:

“Marvin Chester? This is Dr. Andersen’s office.
You have an appointment at 10 am next Tuesday.
I need to cancel it.
I’ll put you down for 2 pm.
Do you have any problem with this?”

I am offended by the words and the tone of voice. I think of answering:

“Is this a command from an imperial highness? When you break an appointment, common courtesy dictates an apology. And a request for another appointment. Not a summons to appear. Not a recital of when audience will next be granted. I’d like to speak to Dr. Andersen. Please have her call me.”

That’s what went through my mind but it didn’t pass my lips. Instead I answered:

“O.K. 2 pm it is.”

On hanging up the phone I rejoice in the blessings of perspective. By restraining my outrage I bought myself perhaps hours, if not days, of precious life moments that would otherwise have been wasted in the fruitless instruction of others on how to behave.
________________________

This stepping stone once read:

RIGHTEOUS INDIGNATION IS A TEMPER TANTRUM.