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Legal tender is used to denominate these flows, but in what sense is it created ex nihilo?

Because the pension system is part of the public sector.

Imagine a water pipe that will support a flow of up to N litre per minute. Putting less water through it yesterday does not mean that you can put more water through it today. And putting more water through it yesterday does not mean that you can put less water through it today.

Your pension contribution is water that was put through the pipe yesterday. It doesn't really matter today, except as a historical record of how the system got to where it is.

Most people think of money as a stock - gold in a vault, or, in our analogy, water in the water tower. If you have a water tower with a limited amount of water, then it does matter how much water you put through the pipe yesterday - you might run out of water. But the magic of legal tender laws is that they create a wholly arbitrary amount of money to begin with: If the water levels in the tower seem too low for comfort, the magic of double entry bookkeeping can instantly conjure as much water as you want for your tower.

Now, that doesn't mean that you can run around spending money willy-nilly. You still have to suit your expense profile to the needs of your industrial policy. But it means that you don't have to choose between suiting your expenditures to the needs of the economy today or the needs of the economy tomorrow.

Now, it is possible to pretend that pensions aren't part of the public sector, in the same way that the operator of our water tower can pretend that he doesn't know how to make water from thin air. But that's a political choice, and those who are less blinkered might legitimately ask why the sovereign is denying itself a useful tool for economic planning.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Oct 22nd, 2010 at 09:53:18 AM EST
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The Stock-Flow analysis applied to pensions! This goes a long way to justifying the US "pay as you go" approach originally intended. This system was modified in the '80s into one that was "actuarially sound" but that very soundness was converted, by looting, into apparent deficit, and the very existence of that deficit has been used by the looters to call into question the feasibility of the whole endeavor.

When a Stock approach is actually attempted, great care would have to be taken over the disposition of the Stock of money going into the pension both to avoid crashing the economy due to excessive reduction of the money supply, if the withholding is directed into gold, for instance, or loss of the money through mal-investment. Given the outcome we might conclude that the entire point of the US exercise was to create a pool of money that was available for subtle looting.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Oct 23rd, 2010 at 11:37:10 AM EST
[ Parent ]


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