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NAIRU - The real cause of high unemployment


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My name is Pat (male). I hate blogs - love message boards!

One place that our education system is sadly lacking in is economics and the history of money. Think about it, where you ever given any instruction about money itself? The links below will explain the nature of money - which to many people is an almost unbelievable suprise.

As Klien and his corporatist buddies demonstrated, Federal Policy *IS* within the domain of provincial politics. To that end, I'll describe a policy that is the main reason for the decline of Canada's working class since 1974.

Non-Accelerating Inflation Rate of Unemployment (NAIRU). Economists use this term to describe the lowest unemployment rate that does not cause wage-push inflation (too few workers = rising wages as employers outbid each other).

There are variations on the name. Non Accessing Inflation Rate of Unemployment, Natural Unemployment rate, some even try to steal the name Full Employment, which is an insult.

The Bank of Canada, NOT the federal or provincial governments, is the one that sets our national unemployment rate. Canada has been given a NAIRU of 7.5% and the Bank raises and lowers interest rates to keep us at that unemployment rate. If a politician actually does something to stimulate job growth, the bank raises interest rates and crushes jobs. If we do better, someone else has to lose.

Here is a graph of interest rates and unemployment in Canada. The really wiggly dotted line is the change in core Consumer Price Index during the same period. This is hugely exaggerated as, at this scale, the line would have been flat.

NAIRUCAN.gif

As you can see, interest and unemployment are inversely proportional while the interest rate changes have ZERO correlation with changes in inflation. Keep this in mind.

* Unemployment figures from Organization for Economic Cooperation and Developmend (OECD). CPI and interst rates from the Bank of Canada.

NAIRU is a sham. There is a minimum unemployment rate without inflation, and that is between three and four percent. This range is where there is (roughly) one unemployed person for each job opening. You cannot get much lower as this reflects the ongoing "flux" of labour - new entrancts into the labour market, people retiring, people moving between jobs. This is referred to as "full employment"

Full employment is a capitalist system's NORMAL unemployment rate.. Between WWII and 1974 Canada spent most of its time in, or close to, full employment with negligible inflation.

So why NAIRU? Well, if you read the links below you'll understand how our money supply has been inflating at an alarming rate since the early 70s. This inflating money supply would be causing large prices increases (classic inflation) if it was allowed to fall into the hands of people that would actually spend it. By keeping unemployment at roughly double FULL employment, you keep people from earning a living - reducing the spending capability of the "lower" classes. In addition, Market economics will tell you that two people for every one job means declining real wages - again, reducing the ability for lower classes to spend money.

The other really "keen" thing about NAIRU is that falling wages allows for greater profits for employers.

If you want to look up NAIRU at some expert sources:

World Bank search for NAIRU

http://extsearch.worldbank.org/servlet/Sit...Servlet?q=nairu

Organization of Economic Cooperation and Development

http://www.oecd.org/dataoecd/34/2/1863851.pdf

Educate yourselves about money itself. You can rail against the injustice of Environmental and Social problems all you want but, until we take back control of the very basis of our economy, NO provincial political party will ever be able to do anything meaningful - they (and we) will be too poor.

Whomever you vote for, write your candidates and demand to know their position on NAIRU. Demand that they speak up to the Federal government and get economics into the public debate.

More information on the topic

http://politicsofmoney.net

http://www.comer.org

http://www.canadianactionparty.ca

_________________

Until the control of the issue of currency and credit is restored to government and recognized as its most sacred responsibility,

all talk of the sovereignty of parliament and of democracy is idle and futile."- William Lyon Mackenzie King

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One place that our education system is sadly lacking in is economics and the history of money. Think about it, where you ever given any instruction about money itself? The links above will explain the nature of money - which to many people is an almost unbelievable suprise.

This is taught in highschool economics bub... at least thats where i learned about it first. The rpoblem is most people are deadset on taking bird coursed throughout highschool so they can get the highest marks for post secondary

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One place that our education system is sadly lacking in is economics and the history of money. Think about it, where you ever given any instruction about money itself? The links above will explain the nature of money - which to many people is an almost unbelievable suprise.

This is taught in highschool economics bub... at least thats where i learned about it first. The rpoblem is most people are deadset on taking bird coursed throughout highschool so they can get the highest marks for post secondary

Should your high school have an economics class, which I would say very few if any do.

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I find hard to believe that any supporter of the Canadian Action Party really understood the economics courses they took. Although it is true that the BOC could create money from nothing they fail to point out that there are negative concesquences: specifically, it would undermine confidence in the monetary system and likely trigger hyper-inflation (i.e. the value of the money would collapse).

Consider this example: any company can create new shares in itself and sell it on the stockmarket. So why would any company borrow money from the bank at a high interest rate? The answer is obvious: the value of the stock would collapse if the company did this too many times.

So in short, the BOC has done a wonderful job maintaining everyone's confidence in the montary system and deserves credit for the healthy economy we have today.

Regards

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I find hard to believe that any supporter of the Canadian Action Party really understood the economics courses they took. Although it is true that the BOC could create money from nothing they fail to point out that there are negative concesquences: specifically, it would undermine confidence in the monetary system and likely trigger hyper-inflation (i.e. the value of the money would collapse).

Consider this example: any company can create new shares in itself and sell it on the stockmarket. So why would any company borrow money from the bank at a high interest rate? 

So in short, the BOC has done a wonderful job maintaining everyone's confidence in the montary system and deserves credit for the healthy economy we have today.

Regards

I've had this discussion several times actually. If I start sounding snarky or condecending, I don't mean to be - just smack me! I will put in more information that you probably need - just so other readers, who might not know, can follow the conversation.

First - the Bank of Canada (BOC) would not be creating money, the government would. The BOCs function is to hold the statutory reserves of private banks and loan that money to federal or provincial governments at low interest rates if they need it. Interest collected on these government loans is used to pay the operating costs of the BOC and any excess (profit) is returned to the government (the sole shareholder).

For those not familiar with Fractional Reserve Banking:

The term fractional reserve refers to the requirement that any bank making a loan must deposit a fraction of that amount with the Bank of Canada as a guarantee. For example, with a 10% reserve requirement, if they make a $1000 loan, they must deposit $100 with the BOC. This serves two functions: first, should the bank fail, this reserve is what depositors could get back. 10% reserve means you'd get $10 back for every $100 you had in the bank. Second, it serves as a limit on how much money a bank can create.

If you don't know how banks create money, Click Here

The BOC is NOT part of our government. It is a private bank, the government merly holds all its shares. In fact, it was entirely private when it opened in 1932 and the government didn't obtain all the shares until 1935.

The answer is obvious: the value of the stock would collapse if the company did this too many times.

You just rebutted your own argument.

98% of Canadians (probably more actually) have no idea that 95% of the new money created each year is created by banks - they think the government creates all of it. Truth is, government creates only about 5% of new money and most of that is the bills and coins we carry around.

If that proportion changed from 95/5 to 50/50, 98% of the population would have no clue anything was different. Just as they had no clue that it went from 50/50 to 95/5 between WWII and today.

The key to confidence in a currency is not in who creates it. It is in the amount that is created. As you point out above, if that company issues shares too many times, the value of the shares is diluted. If it issues only as many as are needed, their value is preserved.

When a bank creates $100 in money it also creates a $100 debt. That $100 money has to disappear in order to pay the $100 debt. This is why we've had such a roller coaster ride with recessions and recoveries - after a period of borrowing comes a period of paying back - the money supply swells and shrinks, causing economic mayhem.

In finance, Government created money is referred to as "high powered money". Why? Because government created money is not debt. There is no interest owed and it does not have to be paid back. A slow and steady increase in money supply by government, enough to meet the increase in population and output (GDP), makes for a good steady economy. No inflation, no recessions. (Yes Hugo, REAL money would be preferrable to both of these fiat methods, but try to convince the general public of that)

The other good thing about Government created money, as apposed to bank created money, is that government SPENDS the money into circulation though infrastructure and programs - reducing the need for tax revenue.

Some words from history to ponder:

"If all the bank loans were paid, no one could have a bank deposit, and there would not be a dollar of coin or currency in circulation. This is a staggering thought. We are completely dependent on the commercial banks. Someone has to borrow every dollar we have in circulation, cash, or credit. If the banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless situation is almost incredible -- but there it is."

- -- Robert H. Hemphill, former Credit Manager The Federal Reserve Bank of Atlanta, Senate Document #23, page 102, January 24,1939

The Great Depression is a shining example of people not learning from history. Every time private banks have been allowed majority control over the creation of money, we've had a "great depression". Most people believe the 30's depression was caused by a stock market crash - this is not true! The crash was only a symptom of the economic system of the time, that system was the cause of the depression. Banks, not government, were in majority control of creating money. Fact is, every time banks have gained control over money creation - we have had a "great depression".

Hugo is probably familiar with the dire warning about "expansion of credit" given by Ludwig Von Mises during the 20s. Mises saw the depression coming, but nobody would listen.

Another popular myth is that FDR's "New Deal" ended the depression. This is absolutely false. Economic recovery did not happen until well into WWII. It was actually accomplished by FDR instituting many banking regulations and greatly increasing the statutory reserve requirement. This greatly reduced bank created money and allowed the treasury department to create more of the money supply. Upwards of 50% during the war, that was reduced to 25% soon after and was slowly whittled down by banking lobbyists over the years.

FDR took his inspiration from Abraham Lincoln - who created "Greenbacks" to finance the civil war while the south relied on bank created money. He also took note of how Lincoln made two mistakes: He didn't limit bank created money AND he created too many greenbacks - got some pretty nasty inflation. However, it was the greenback that won the civil war for Lincoln.

It wasn't until the 60s, when the newer generation - who hadn't experienced the 20s and 30s, constituted the greatest part of the population that banks were able to convince ($$$) politicians to gut the banking regulations and expand credit once again.

Have you never wondered why the depression was worldwide and pretty much at exactly the same time everywhere? Ever wondered why the recovery was the same? Its because the banking changes happened at almost exactly the same time in every country. Banks have been multinational for well over two centuries.

Enough babbling for now - any questions? Have I made any errors?

P.S.

Actually, a bit of trivia - did you know that, prior to the creation of the Bank of England, wooden sticks were used as a type of currency? English Tally Sticks

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You are correct to point out that certain economic problems (the Great Depression, 70s Inflation, et. al.) tended to occur all around the industrialised world because central bankers tended to follow the accepted wisdom of the time and only a crisis would cause them to rethink their ideology.

The current ideology requires that central bankers do not finance government debt but instead require that government finance their debt at prevailing interest rates. Their rational probably has to do with the first principal of economics: if you give sometime away for free it will get abused.

Furthermore, central bankers can point to 25 years of stable inflation and normal business cycles (i.e. no great depression). In short, there is absolutely no reason for central bankers to abandon their polices today since these policies are protecting the stability of our fiat currency system.

You must keep in mind that BOC has only one job: maintain faith in the currency. It is not something that should be used to implement any social policy.

Regards

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You are correct to point out that certain economic problems (the Great Depression, 70s Inflation, et. al.) tended to occur all around the industrialised world because central bankers tended to follow the accepted wisdom of the time and only a crisis would cause them to rethink their ideology.

The current ideology requires that central bankers do not finance government debt but instead require that government finance their debt at prevailing interest rates. Their rational probably has to do with the first principal of economics: if you give sometime away for free it will get abused.

So if you have a choice of using a credit card to buy a car at 22% interest or using a bank loan at 5% - you choose the credit card? Dont forget, that is our money being paid against the 450 billion in interest alone that we owe. Choosing to keep a balance on your credit card when you can just as easily have it in a bank loan for much lower interest rates is... irrational.

As to saying it will get abused, history proves you wrong. Again, just look at the economic data from 1946 to 1970. Abuse of money creation power only occurred after government gave most of it up to banks.

Furthermore, central bankers can point to 25 years of stable inflation and normal business cycles (i.e. no great depression). In short, there is absolutely no reason for central bankers to abandon their polices today since these policies are protecting the stability of our fiat currency system.

Stable inflation - are you sure you want to use that rationale? Compare the economic data from 1946-1970 to 1971-2005. The last 30 some years have been an unmitigated disaster for Canada. Stable inflation is not superior to little inflation. High unemployment in the quest for stable inflation is not sound economic policy.

You must keep in mind that BOC has only one job: maintain faith in the currency. It is not something that should be used to implement any social policy.

Regards

Have you forgotten the value of the Candian dollar? Before the BOC shifted policy from public interest to corporate interest, we enjoyed a dollar that was worth more than the US dollar. The "confidence" in the Canadian dollar today is nowhere near what it was prior to 1970.

The charter of the BOC requires that it lend money to government at low interest rates. This was the deal stuck with commercial banks - we let them create money (chartered) and we borrow the statutory reserve without paying them interest. Mulroney (who now works for a banker) let the banks reneg on that deal yet still keep their charters. Martin (a banker himself), has done nothing to rectify the broken contract.

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As to saying it will get abused, history proves you wrong. Again, just look at the economic data from 1946 to 1970. Abuse of money creation power only occurred after government gave most of it up to banks.

All currencies were backed by gold reserves up until the 1970s. The need to have these reserves is what ensured that the 'free' money was not abused. We could go back to the system you describe if we bring back the gold standard, however, that is likely completely impractical.

My original point is still valid: allowing to BOC to give free money to gov't will encourage abuse and will eventually create serious economic problems.

Stable inflation - are you sure you want to use that rationale? Compare the economic data from 1946-1970 to 1971-2005. The last 30 some years have been an unmitigated disaster for Canada. Stable inflation is not superior to little inflation. High unemployment in the quest for stable inflation is not sound economic policy.

The last 30 years have brought a lot of changes that have created hardships for many people. However, I would argue that these changes were caused by globalisation and that montetary policy has little or nothing to do with it.

Have you forgotten the value of the Candian dollar? Before the BOC shifted policy from public interest to corporate interest, we enjoyed a dollar that was worth more than the US dollar. The "confidence" in the Canadian dollar today is nowhere near what it was prior to 1970.

It is a fallacy to believe that $CDN is weaker than the $US simply because the 1$CDN buys less that $1 US. Using that logic you would say that Japan must have an extremely weak currency because it takes over 100 Yen to buy $US. Today, at .80US, the Canadian dollar enjoys a lot of confidence both within and outside Canada.

Regards

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Sparhawk,

We're getting closer to an understanding here. Still a few problems though.

The gold standard did not prevent "abuse" of "free money". The gold standard effectively disappeared in the 1930s when the ability to redeem bank notes for gold was eliminated.

The gold standard never dictated how much moneysubstitute could be created in the first place - all it dictated was how much gold you had to give people who redeemed the substitutes.

Government created money is not without limitation. Inflation is the check. Create too much and you feed inflation - the voters get mad and you lose the next election in favour of a more restrained party. The irony here is that voters currently think government is creating all the new money, not banks, and governments take the heat for inflation that rightly belongs on the banks.

Bank created money has no such limitation. There is no fractional reserve requirement therefore there is no theoretical limit to how much money a bank can create. There is no "vote loss" threat hanging over the heads of banks - On the contrary, inflation and a declining real wage is a major boost to bank profits. Inflation is good business for banks.

How can you argue that "Free money" for government is bad while "Free money" for banks is good?

Also, please provide data supporting the assertion that banks have stewarded the money supply better than government did. I supplied the data from 1946 to the late 70s showing what happened when government got out of the "Free money" business. How about some of yours?

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I just love how people, faced with real data, resort to diverting topics in an attempt to discredit the source.

If ya can't beat 'em, smear 'em!

Real data? I object to your analysis which makes about as much sense as claiming the earth is flat.

To start with, money is just paper. It is not real wealth. You are making one of the most elementary errors of a non-economist: you are confusing a real value and a nominal value.

I suggest you get a standard economics textbook and read it or even better, enrol in an introductory economics course. You seem to be interested in the subject and no doubt you'll do well. Ask questions, and listen. Good luck!

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Real data? I object to your analysis which makes about as much sense as claiming the earth is flat.

To start with, money is just paper.  It is not real wealth.  You are making one of the most elementary errors of a non-economist: you are confusing a real value and a nominal value.

I suggest you get a standard economics textbook and read it or even better, enrol in an introductory economics course.  You seem to be interested in the subject and no doubt you'll do well.  Ask questions, and listen. Good luck!

Lame - you dismiss, you do not rebutt. If my analysis is incorrect then please, share your wisdom. Explain please.

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Here's a couple more places you can check on this "flat earth" topic.

Financial Market Center "NAIRU: Vicious Euphemism "

http://www.fmcenter.org/site/pp.asp?c=8fLGJTOyHpE&b=235972

Federal Reserve "The Magic's Gone"

http://minneapolisfed.org/pubs/region/01-09/magic.cfm

Bank of Canada "The NAIRU in Canada: Concepts, Determinants and Estimates"

http://www.bankofcanada.ca/en/res/tr50-e.htm

Edit: Oops - forgot the money supply example

http://www40.statcan.ca/l01/cst01/econ07.htm

Take a look at the total money supply from 2000 to 2004 - thats a 23% increase and it doesn't even include M4.

We have 23% more money floating around, there should be 23% higher prices overall, but there isn't. Wages should be 23% higher, but they are not. Where, pray tell, did all the money go?

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Where did I give that impression? Not saying I didn't - just that if I did, I should fix it as that is not the impression I intended to give.

No paper money has real value - only percieved value. It is a medium of exchange, no more, no less. In truth, gold is the same way - its value is not fixed, it is determined by demand.

Supposed the two of us had a country and a currency all to ourselves (NO, not suggesting anything here! ). We have $30 in the currency of the land. I have $10 and you have $20.

One day we decide "Hey, lets double our money!" - I have $20 and you have $40. The number of dollars has changed but the relative purchasing power of the total currency has not. Each dollar willl simply end up buying half as much. Neither of us has changed our relative wealth.

On the other hand, if we double the total wealth but you get all the new money; me $10, you $50. The purchasing power of the total currency in circulation has not changed, but our purchasing power, relative to each other, certainly has.

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