Fiat Money and Models

[John Gelles <jjgelles@xxxxxxxx>]

                            QUESTIONS

     1. From Bernie Tuchman: Can fiat money provide real
     purchasing power to reach levels of growth, investment,
     and monetized demand (or public financing) for environ-
     mental protection and benign industrial development
     where needed at home and abroad?

     2. From Gonzalo Fonseca: Can nonlinear models improve
     our simulation of results of policy alternatives, such
     as, those that employ fiat money?

       (Defining improvement as: Creating simulations
        and projections which, over time, gain a following
        among mainstream economists and their clients in
        government.)

     3. From Paul Davidson: Do linear models and persuasive
     exposition offer a better way to gain a mainstream
     following, as described above?

     4. Since fiat money, (and other calls for radical
     government intervention in the economy), run counter to
     mainstream schemes for environmental protection and
     economic development -- is it PKT's responsibility to
     try to reach a narrow consensus first, and go on from
     there, if possible?

                             ANSWERS

     1. Japan's one percent discount rate approaches the
     ideal of fiat money. But the money will not be offered
     to authorities to repair the environment faster than
     current practice. Rather, the money will go unused,
     because Japan's economic giants are organized around
     profitable exports whose rate of growth will not be
     greatly spurred by low interest rates in Japan.

          a. Of course, Bernie Tuchman specified that the
     fiat money he wants must be international, not Yen.
     I do not think there is any difference -- the hard Yen
     is international.  But he also desires the fiat money
     to be applied to international priorities. Here he is
     correct.

          b. If Japanese banks encourage large investments
     in Asia, as they have been allowing, then the near-fiat
     Yen will stimulate Asian growth.  But, in that event,
     Japan will follow the path the US took in financing
     its future export competitors.  Fear of that history
     will probably temper the use of the Yen to finance
     new monsters in Asia.

          c. In the end, as Tuchman says, any pump priming
     with fiat money must be continuous; and must eventually
     change the nature of the system from one of recurring
     contractions, (constructive destruction), to one of
     continuous expansion and actuarial refinement.

          d. One can only hope that the US will follow the
     Japanese lead and lower its discount rate -- to
     actually employ zero-interest fiat money to pay for
     national priorities in the social arena, as well as
     environmental repair. We have a long way to go to
     repair the costs of poverty that damage every
     American's life.

          e. Of course, in the US instance, demand for a
     better standard of living will skyrocket if we inject
     sufficient fiat money into the system to end poverty;
     and that will require automation to be in place to meet
     such huge demand. Programmed increases in purchasing
     power cannot sensibly be invited to precede capacity to
     produce the things to be purchased.

          f. As with comment c, above, the nature of the
     system will have to change to make unemployment
     unthinkable. Rather than the "end of work", as some
     pundits predict automation will bring, it must be the
     end of idleness and mischief that the system aims for.
     The transition from school to work will have to be made
     smooth as silk. A negative-income loan account with the
     IRS, plus first class business education from junior
     high school on, can make this possible.

     2. Non-linear modelling of fiat money injections into
     private markets may be possible. The key is, of course,
     the dynamic nature of the model. I believe most of the
     programmed trading models in use by major investors who
     believe market timing is possible, are of nonlinear,
     dynamic design. Fiat money models would be closer to
     these, in my opinion, than linear models.

     3. Linear models and graceful exposition will have to
     govern attempts to gain popular support for change.
     This will not rule out simple curves, where they show
     the truth.  But, where simpler models serve to enlarge
     the audience of informed voters, and these models are
     presented honestly, it would seem prudent to use them.

     4. The idea often heard in our messages that the main-
     stream are ill informed, ought to be squelched. We all
     know that civilization requires a taming of man's
     anumal inheritance. Economic efficiency coxists with
     moral sentiment; and the resulting rules for the growth
     of civilization require adherence to values apart from
     natural law: We oppose tyranny, protect individual
     rights, respect life and liberty, and may soon have to
     recognize certain economic rights.

          a. These values come to be integrated into the
     practice of political economy -- and, as they change
     through political processes, economies change with
     them.

          b, At the heart of differences between PKT and
     mainstream academic economists, as between various
     individuals outside the mainstream and both inside and
     outside PKT, are differences in values. If exposition
     can reveal the values spoken for, the technical argu-
     ment over whose model is best will resolve itself.

          John  Gelles      jjgelles@xxxxxxxx