What Planet Money Fails to Consider . . . Again
The Planet Money blog mentioned the new iPhone 5 coming out soon, and quoted a note from someone at JPMorgan. The claim, according to Planet Money:
The JPMorgan note seems very mathy and precise. It starts with the full cost of the new phone, subtracts the value of the imports in each phone (imports are subtracted from economic growth numbers) and estimates the total number of phones likely to be sold in the last three months of the year.
Bottom line, according to the note: The new iPhone could add 0.33 percent to U.S. economic growth. That's actually a lot, when you consider that total economic growth is only about 2 percent.
A pretty bold claim, do you think? Jacob Goldstein thinks so, and savages the note's claim as the blog post continues: "But to arrive at that conclusion, JPMorgan assumes that every single dollar people spend on new iPhones would not otherwise have been spent on anything else during the last three months of the year." Goldstein goes on to explain Keynes' paradox of thrift, where money spent in one sector of the economy is simply taken from another, so a growth in one sector is not necessarily a boost for the economy as a whole. Got that?
So, what did Mr. Goldstein miss, and why might the JPMorgan note be accurate? Let's consult Ellen Brown for the answer:
Here is how the credit card scheme works: when you sign a merchant's credit card slip, you are creating a "negotiable instrument." A negotiable instrument is anything that is signed and convertible into money or that can be used as money. The merchant takes this negotiable instrument and deposits it into his merchant's checking account, a special account required of all businesses that accept credit. The account goes up by the amount on the slip, indicating that the merchant has been paid. The charge slip is forwarded to the credit card company (Visa, MasterCard, etc.), which bundles your charges and sends them to a bank. The bank then sends you a statement, which you pay with a check, causing your transaction account to be debited at your bank. At no point has a bank lent you its money or its depositors' money. Rather, your charge slip (a negotiable instrument) has become an "asset" against which credit has been advanced. The bank has done nothing but monetize your own I.O.U. or promise to repay.
When you lend someone your own money, your assets go down by the amount that the borrower's assets go up. But when a bank lends you money, its assets go up. Its liabilities also go up, since its depostis are counted as liabilities; but the money isn't really there. It is simply a liability -- something that is owed back to the depositor. The bank turns your promise to pay into an asset and a liability at the same time, balancing its books without actually transferring any pre-existing money to you.
(Ellen Hodgson Brown, Web of Debt, Third Millennium Press, 2008, p. 284, italics Brown's, emboldening mine.)
For further evidence that Planet Money is missing the bigger picture, let's consider the "mathy" bit of the JPMorgan note, which opens with "We believe the release of iPhone 5 could potentially add between 1/4 to 1/2%-point to fourth quarter annualized GDP growth." That's a very specific claim. He or she goes on to explain that $400 of the estimated $600 purchase price will stay in the US and thus boost GDP, the balance going to pay the factory in China.
And here's what Mr. Goldstein is missing, and what the JPM analyst might be getting: Most iPhones are probably purchased with credit cards. Seriously, have you been to an Apple store? Credit cards are no problem; every sales rep carries a wireless card swiper unit. Pull cash from your pocket, and the sales person immediately has to take you to another part of the store where the hidden cash drawer is stashed; if the purchase is a sizable one, you'd best hope you brought exact change.
Most iPhone purchases will therefore generate bank debt money, only a fraction of which will likely be paid off immediately. Most of these Number 5 Units will generate debt that will probably linger on the balance sheets of the holders for months, debt money that Apple will spend here in the US.
And as I've mentioned before, Planet Money correspondents have never, ever showed even an inkling of understanding how our bank debt money generating system works. Seriously, now that they have a transcript of the story that incited my linked ire, head over and read what they missed.
Ira Glass Hey fellas.
Alex Blumberg Hey Ira.
David Kestenbaum Hey, what are you doing here, we're doing a radio story.
Ira Glass Well I know. Actually, I've been listening and it's fascinating of course. And excellent story as always. But I have some questions. For starters, you're saying that the Fed created over a trillion dollars to bailout the economy. Does that money get added to the deficit?
Alex Blumberg No, it doesn't.
Ira Glass Why not?
David Kestenbaum The federal deficit, that's when the federal government spends more money than it collects in taxes. So it has to borrow to cover the difference. That's with the deficit is, that borrowing. And the Fed is, as you said in your intro, a totally separate institution. It's not part of the federal government. So it hasn't nothing to do with this.
Ira Glass OK, but when the Fed loses money on some mall that it now owns, does that eventually in some sneaky back door way, come out of my taxes?
David Kestenbaum No. Because first of all, it's not part of the government. Second of all, even if it were, every year the Fed makes a profit. The Fed never loses money. It can create money out of thin air from nowhere. It uses that to buy government bonds, things that pay interest. So it gets interest every year. And every year it makes a huge profit, like in 2009 at the height of the crisis, it made $47 billion.
Alex Blumberg And that profit they always turn over to the federal government. So it actually reduces the deficit.
Ira Glass And so all of this money that they've created since 2008, totaling it up if I understand right, it's over $1.6 trillion. Does this have anything to do with the TARP program to buy up toxic assets?
David Kestenbaum No, that was the federal government.
Ira Glass Does it have anything to do with Obama's stimulus package.
David Kestenbaum No, federal government.
Ira Glass But this $1.6 trillion is bigger than both of those combined. We have these
huge fights that drag on for weeks over the stimulus package and over these other things, and then the Fed does something that dwarfs these in size. It's twice as big as either of those programs. And there's no discussion. The Congress doesn't debate it. The president doesn't approve it. There's no public input. Some eggheads in a room just kind of wave a wand and then it just happens?
David Kestenbaum Yep. That's the idea of a central bank.
Ira Glass OK, is that a good thing?
As you can see, they display nothing but mysticism and/or ignorance for the role banks smaller than the Federal Reserve play in creating money. The only difference between the Fed and the smaller depository banks is the fractional reserve requirement, something absent from the Fed itself. They even, if I remember correctly, fail to note that the Fed itself is a conglomeration of private banks.
So, sorry, Planet Money folks, but if every iPhone is bought with a credit card and the balance carried for just three months, then yes, that new money will circulate in the fourth quarter and thus boost our nation's economic activity, just as the egghead at JPMorgan claims. Ellen Brown explains why above. If you don't understand that excerpt-and I have every expectation that you won't-it's time for you to become reporters and do some actual research.
Or is how banks literally make our nation's money something your sole sponsor Ally Bank would rather the American people not learn?
The JPMorgan note seems very mathy and precise. It starts with the full cost of the new phone, subtracts the value of the imports in each phone (imports are subtracted from economic growth numbers) and estimates the total number of phones likely to be sold in the last three months of the year.
Bottom line, according to the note: The new iPhone could add 0.33 percent to U.S. economic growth. That's actually a lot, when you consider that total economic growth is only about 2 percent.
A pretty bold claim, do you think? Jacob Goldstein thinks so, and savages the note's claim as the blog post continues: "But to arrive at that conclusion, JPMorgan assumes that every single dollar people spend on new iPhones would not otherwise have been spent on anything else during the last three months of the year." Goldstein goes on to explain Keynes' paradox of thrift, where money spent in one sector of the economy is simply taken from another, so a growth in one sector is not necessarily a boost for the economy as a whole. Got that?
So, what did Mr. Goldstein miss, and why might the JPMorgan note be accurate? Let's consult Ellen Brown for the answer:
Here is how the credit card scheme works: when you sign a merchant's credit card slip, you are creating a "negotiable instrument." A negotiable instrument is anything that is signed and convertible into money or that can be used as money. The merchant takes this negotiable instrument and deposits it into his merchant's checking account, a special account required of all businesses that accept credit. The account goes up by the amount on the slip, indicating that the merchant has been paid. The charge slip is forwarded to the credit card company (Visa, MasterCard, etc.), which bundles your charges and sends them to a bank. The bank then sends you a statement, which you pay with a check, causing your transaction account to be debited at your bank. At no point has a bank lent you its money or its depositors' money. Rather, your charge slip (a negotiable instrument) has become an "asset" against which credit has been advanced. The bank has done nothing but monetize your own I.O.U. or promise to repay.
When you lend someone your own money, your assets go down by the amount that the borrower's assets go up. But when a bank lends you money, its assets go up. Its liabilities also go up, since its depostis are counted as liabilities; but the money isn't really there. It is simply a liability -- something that is owed back to the depositor. The bank turns your promise to pay into an asset and a liability at the same time, balancing its books without actually transferring any pre-existing money to you.
(Ellen Hodgson Brown, Web of Debt, Third Millennium Press, 2008, p. 284, italics Brown's, emboldening mine.)
For further evidence that Planet Money is missing the bigger picture, let's consider the "mathy" bit of the JPMorgan note, which opens with "We believe the release of iPhone 5 could potentially add between 1/4 to 1/2%-point to fourth quarter annualized GDP growth." That's a very specific claim. He or she goes on to explain that $400 of the estimated $600 purchase price will stay in the US and thus boost GDP, the balance going to pay the factory in China.
And here's what Mr. Goldstein is missing, and what the JPM analyst might be getting: Most iPhones are probably purchased with credit cards. Seriously, have you been to an Apple store? Credit cards are no problem; every sales rep carries a wireless card swiper unit. Pull cash from your pocket, and the sales person immediately has to take you to another part of the store where the hidden cash drawer is stashed; if the purchase is a sizable one, you'd best hope you brought exact change.
Most iPhone purchases will therefore generate bank debt money, only a fraction of which will likely be paid off immediately. Most of these Number 5 Units will generate debt that will probably linger on the balance sheets of the holders for months, debt money that Apple will spend here in the US.
And as I've mentioned before, Planet Money correspondents have never, ever showed even an inkling of understanding how our bank debt money generating system works. Seriously, now that they have a transcript of the story that incited my linked ire, head over and read what they missed.
Ira Glass Hey fellas.
Alex Blumberg Hey Ira.
David Kestenbaum Hey, what are you doing here, we're doing a radio story.
Ira Glass Well I know. Actually, I've been listening and it's fascinating of course. And excellent story as always. But I have some questions. For starters, you're saying that the Fed created over a trillion dollars to bailout the economy. Does that money get added to the deficit?
Alex Blumberg No, it doesn't.
Ira Glass Why not?
David Kestenbaum The federal deficit, that's when the federal government spends more money than it collects in taxes. So it has to borrow to cover the difference. That's with the deficit is, that borrowing. And the Fed is, as you said in your intro, a totally separate institution. It's not part of the federal government. So it hasn't nothing to do with this.
Ira Glass OK, but when the Fed loses money on some mall that it now owns, does that eventually in some sneaky back door way, come out of my taxes?
David Kestenbaum No. Because first of all, it's not part of the government. Second of all, even if it were, every year the Fed makes a profit. The Fed never loses money. It can create money out of thin air from nowhere. It uses that to buy government bonds, things that pay interest. So it gets interest every year. And every year it makes a huge profit, like in 2009 at the height of the crisis, it made $47 billion.
Alex Blumberg And that profit they always turn over to the federal government. So it actually reduces the deficit.
Ira Glass And so all of this money that they've created since 2008, totaling it up if I understand right, it's over $1.6 trillion. Does this have anything to do with the TARP program to buy up toxic assets?
David Kestenbaum No, that was the federal government.
Ira Glass Does it have anything to do with Obama's stimulus package.
David Kestenbaum No, federal government.
Ira Glass But this $1.6 trillion is bigger than both of those combined. We have these
huge fights that drag on for weeks over the stimulus package and over these other things, and then the Fed does something that dwarfs these in size. It's twice as big as either of those programs. And there's no discussion. The Congress doesn't debate it. The president doesn't approve it. There's no public input. Some eggheads in a room just kind of wave a wand and then it just happens?
David Kestenbaum Yep. That's the idea of a central bank.
Ira Glass OK, is that a good thing?
As you can see, they display nothing but mysticism and/or ignorance for the role banks smaller than the Federal Reserve play in creating money. The only difference between the Fed and the smaller depository banks is the fractional reserve requirement, something absent from the Fed itself. They even, if I remember correctly, fail to note that the Fed itself is a conglomeration of private banks.
So, sorry, Planet Money folks, but if every iPhone is bought with a credit card and the balance carried for just three months, then yes, that new money will circulate in the fourth quarter and thus boost our nation's economic activity, just as the egghead at JPMorgan claims. Ellen Brown explains why above. If you don't understand that excerpt-and I have every expectation that you won't-it's time for you to become reporters and do some actual research.
Or is how banks literally make our nation's money something your sole sponsor Ally Bank would rather the American people not learn?