A Disturbing Trend in Republican Convention Speeches
I’ve been watching a number of the Republican National Convention speeches and while I like a lot of what I’ve heard I have to say that there seems to be one overarching and rather disturbing trend in the rhetoric. There is an endless discussion about the USA going bankrupt. Even worse, there have been endless comparisons to Greece and other European nations. This is an egregious misunderstanding of the way our monetary system works. I won’t regurgitate all of what I just recently wrote in this piece, but this is really rather simple so I’ll pull a snippet:
“The USA has an institutional arrangement in which it is a currency issuer. That is, while the Treasury is an operational currency user (meaning it must always have funds in its account at the Fed before it can spend those funds) it is always able to harness the banks to procure funds. This is achieved through bond auctions in which the dealers are required to bid. The NY Fed explains:
Primary dealers are also required to participate in all auctions of U.S. government debt and to make reasonable markets for the New York Fed when it transacts on behalf of its foreign official account-holders.
So there’s never a concern about auctions failing in the USA. That is, the Treasury is a currency user, but the government as a whole can be seen as a currency issuer by institutional design because of this implicit funding guarantee. “
The USA has Europe’s fix in place. We have a unified political entity with a Treasury and central bank that can always procure funding by harnessing private banks. The threat is never insolvency in this regard. Ie, the USA is NOTHING like Greece, a household or a business. There is no such thing as the USA “running out of money”. Our only constraint is inflation and that’s a very different constraint than solvency….
If the politicians understood how the modern monetary system actually worked they wouldn’t make such silly comparisons and waste so much breath focusing on the wrong constraint. Sadly, I don’t think the Democrats are any better on these issues….
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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If the parties have been hosted, and the mechanism is private credit formation, then it follows that private credit (bank money) creation should be prohibited if we want a proper Federal Republic, as the founder’s intended.
Here is a comment from the IMF after their review of the 100% reserve plan: (Of course that the IMF would come to these conclusions is surprising since they have been monetarist shills in the past, especially with regards to Latin America. Computer modeling is helping overcome monetarist bias.)
Click on REN to go the IMF whitepaper link.
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Furthermore, none of these benefits come at the expense of diminishing the core useful functions of a private financial system. Under the Chicago Plan private financial institutions would continue to play a key role in providing a state-of-the-art payments system, facilitating the efficient allocation of capital to its most productive uses, and
facilitating intertemporal smoothing by households and firms. Credit, especially socially useful credit that supports real physical investment activity, would continue to exist. What would cease to exist however is the proliferation of credit created, at the almost
exclusive initiative of private institutions, for the sole purpose of creating an adequate money supply that can easily be created debt-free.
‘Financial/Crony/Cowboy’ Capitalism: Sounds like the most generic term would be ‘Parasitic’ Capitalism (vs the other ‘PC’).
Looks like I need to check out that IMF paper. Thanks.
dumb
Hmm comments cannot be seen anymore. I am curious what Cullen replied to my post regarding MR.
Clicking on ‘Previous Comments’ at the bottom should pull them up.
I found both your comment (which echoed some of my thoughts) and Cullen’s reply, of significant interest.
Well, I do not find Cullen’s comment very satisfying. And I am still quite perplexed by his U-turn. I will need to read now his MR treatise. The funny thing is that he argues / -ed both cases with equal fervor.
He focuses on who issues the money. Here the banks have an exorbitant privilege that they have abused too much in the last 20-30 years or even before to corrupt government and escape the bounds of rule of law and avoid serving society, but actually to rape society while “doing God’s work”. Money is issued by banks (or the Fed, but the Fed is privately owned by the banks, although it gives its profit to the Treasury, its main purpose is to protect overstretched FRL banks), but money is not created by the banks, but by the borrowers. And here comes the distinction – the government is a privileged borrower.
So the question who issues the money is not that importnant with regard to the question whether the state “prints” money or not. Every time the state borrows it creates money and it has no limit on it (except for the farce of the debt limit). By outsourcing the issuance of money to banks it gives them an unnecessary economic rent, not justifiable by either capitalism, free markets or a free society / democracy.
Banks need to be split, Glass-Steagall reimposed, regulation and law applied to them and their CEOs, control fraudsters belong in jail (check Milken and S&L crisis), investmnet banks should never be bailed out and should be split from commercial banks, lobbying should be prohibited, zombie commercial banks should be restructured in an orderly fashion (equity holders wiped out, bondholders take a haircut and convert some bonds to equity) etc.
A number of us were initially disconcerted by the shift from MMT to MR.
I think Cullen has some tendency toward overstatement, both for and against, but attribute this to a ‘youthful enthusiasm’ balanced by a sincere desire to arrive at and promote a deeper understanding of things that matter. Observing/participating in an evolving line of thought has its rewards, and patience seems warranted.
As to the Fed, I still see it primarily as an extension of Congressional power (which Congress can revoke or alter at any time).
I am currently working through the IMF working paper recommended by ‘REN’, among others, who has similar concerns. (Click on ‘REN’ at the top of these comments and it will pull the paper up as a ‘Google Doc’.) It presents some very interesting conclusions, drawing on the fairly radical ‘Chicago Plan’ developed during the depths of the Great Depression – ironically at the same place that later became the bastion of ‘neo-liberalism’ under Friedman and others.
The paper also supports Cullen’s claim that he is only describing the way things are, in labeling the private bank creation of ‘money’ as ‘primary’. He has also expressed some support for this process in limiting the power of government over the monetary system, which is an area of disagreement for me, but I see the validity of his main point.
PS: And I have a sneaking suspicion that I tend to come across as insufferably pompous.
InvestorX,
This is by no means a “U-Turn”. If anything, it is a detour on the path I’ve always been on. I’ve always been a heterodox thinker and my introduction to MMT in 2010 provided substantial understanding and insight to my economic views. What we’ve done with MR is taken what we see as the best pieces of MMT and utilized our understanding of the institutional design of the monetary system to provide the best overall description of the monetary system that we can offer.
There are still similarities between MR and MMT. Both believe the USA cannot “run out of money” and that bank loans create deposits, that the money multiplier is a myth, that govt is a powerful tool, etc. But there are some differences in our understandings of the monetary system that derive from MR’s institutional descriptions.
It’s not a “u-turn” at all. It’s an evolution. MMTers like to say they stand on the shoulders of giants. MR is no different. We are not reinventing the wheel. We are adding insights to what we believe is a more accurate portrayal of money, finance and the monetary system.
Cullen,
thanks for the rply. I understand. Better to keep an open mind, no doubt. Keep improving.
How about addressing some of my points:
– money is created by the borrower
– in the case of govt the borrower is principally sovereign, although it pretends that it is not (basically what MMT says)
– govt needs not pay private banks for borrowing (unless in a gold standard with no FRL)
– banks are corrupt by FRL and they use FRL to corrupt govt
– The Fed is a trojan horse, pretending that it is a govt entity or that it cares about fighting inflation (actually it is inflation’s abetter), but in fact its first and main purpose is to protect FRL banks that have overstretched
Hi Investor,
The key to understanding our monetary system is understanding the institutional design and relationships. This is why JKH’s contingent institutional approach is so important and has been so influential in altering my views to some degree. He gets the institutional relationships down perfectly and in doing so he understands the operational realities perfectly. It’s not a U-turn, it’s a very detailed understanding of why some of the bigger points that MMT makes and why a more precise understanding than MMT’s is necessary (though MMT is extremely helpful in many aspects). MMT essentially alters the institutional relationships in order to satisfy a preconceived bias/thesis (the state theory). It’s helpful in understanding, but not a description of our reality. In order to understand reality you must describe why the current institutional design is the way it is and understand why it makes sense (or doesn’t make sense).
Regarding your points:
- I would say money is created by the borrower AND the lender. It takes two to tango.
- The govt is designed as a user of its own currency in order to sustain the viability of a competitive private banking system which issues money based on market demand and not based on govt needs and wants.
- Banks are corrupted by a lack of regulation and oversight in the same way that a land with no laws is ripe to be corrupted by lawless men in search of power.
- The Fed’s main purpose is to protect private competitive banking. The alternative to this institutional design feature is nationalized banking or rogue banking. I would argue that both are worse than the current design.
http://spectator.org/archives/2012/08/31/romney-bain-and-me/
Deep insight into Romney’s background. If the 3rd to the
last paragraph on the article’s last page is any indication,
I think your concerns re:Romney and deficits will be allayed.
As long as equity capital takes an equity position in the business. That is, they want to create real value to the economy rather than financial value. For example, a manager can make the company “appear” to do well by doing stock buybacks. This allows the stock options to “appreciate” as if they are in demand. Stock options are exercised, as management takes their money and runs. Private equity is famous for doing financial games and not taking real equity positions. If Bain builds real capital, or real wealth, then good. Too often private equity refinances companies, and the principles slice out wealth for themselves, while really contributing nothing but perpetual debt.
Much harder is to build real product and duke it out in the market, creating real jobs and value. Investing in productivity is the hard thing to do.
Here’s a comment from the article: Regardless of what politicians promise to gullible voters, government services cannot ultimately escape the constraints of supply and demand.A price of “free” evokes unbounded demand while choking off supply.
Supply side limits need to be drawn. There is a line in the sand. Government has a role creating for the commonwealth at the lowest price. Privatization wants to toll the commons in order to rake off rents. These rents come also in the form of “management fees” and other bloats. This is not the lowest cost, but instead is a perpetual rent scheme – a high cost. Some areas should be left to Government, a thought anathema to some supply siders. Do we want private equity running a nuclear power plant? Privatization often resists regulation in order to do takings; mining, insurance, land and finance all agitate for taxing labor and untaxing their industries. Government ownership or regulation should include Roads, Infrastructure, Power, Water, Military, and all other inelastic markets.
Supply side can become predatory when it defines government out of its role. Supply side may easily become financialized and sides with monetarists, and leads us down a road of debt peonage. Already 40% of our economy is consumed by the FIRE sector, adding costs and making us unproductive.
For those not wanting to read the whole article:
“Today, American politics is widely obsessed with the formidable data of debt and deficits that overshadow our future and sow despair. America’s liabilities indeed loom massively on the horizon. But the first edition of Wealth & Poverty, published in 1980, sprang from a period of essentially balanced budgets and trade surpluses under Jimmy Carter and helped launch a siege of deficits and trade gaps under Ronald Reagan. During the Carter years, the government was mostly in the black while everyone else was in the red. Under Reagan, though, the trillion-dollar rise in government liabilities was dwarfed by a $17 trillion expansion of private-sector assets released by companies such as Bain Capital under Mitt Romney. Over the decades following the Reagan revolution, government liabilities continued to expand, but once again private-sector asset values increased more—60 trillion dollars more.”(see reference above to George Gilder)
“So apart from that, Mr. Lincoln, what did you think of the show?”
So apart from a succession of speakers harping on burgeoning deficits and expanding entitlement programs, what good, interesting, or constructive proposals, if any, did you find in the Republican speeches?
Apart from the Obama Adminstration not having the wrong idea of quickly reducing the deficit and bringing on another deep recession, what do you find that the Obama Presidency is doing wrong?
I am not asking you to pick political sides. It is just that when politics is informed by partisans for one or the other side, it is hard to get a constructive critique of either side, as to what is good about what they are proposing and what will cause harm.
I find the repeated promises by Dems that they will forcibly relieve the wealthy of their “excess” and redirect the money to those who will squander it far more disturbing.
I’m also puzzled by the fact that others on this site (presumably 1%ers) are not at least slightly bothered by this.
I don’t think the Republicans are worried about bankruptcy – they are creating a fear-point for the less enlightened voter.
It’s about votes…