AMERICA CANNOT GO THE WAY OF GREECE
The headline piece on CNN today is an opinion piece by Fareed Zakaria asking whether or not the USA will suffer the same fate as Greece. He writes:
“Will America face the same financial disaster that the Greek government faces, with a soaring deficit and debt, markets that have lost faith in it and a downward spiral of budget cuts that then further depress the economy?
It might, but let us understand something really important: America stands in a fundamentally different place than does Greece.”
At this point my ears perked up because it seemed like a major mainstream media pundit might be on the verge of a major breakthrough in understanding the US monetary system and how it differs from Europe. But then Zakaria goes into all the reasons that we are not Greece without ever mentioning the absolute most important point.
(Please pardon me while I scream this because it is a message that desperately need to be heard more loudly than I have previously said it): GREECE IS A CURRENCY USER. THE USA IS A CURRENCY ISSUER. LIKE A HOUSEHOLD, BUSINESS OR STATE GOVERNMENT IN THE USA, THE SPENDING OF GREECE IS ALWAYS CONSTRAINED. THAT MEANS GREECE MUST ALWAYS ACQUIRE FUNDS BEFORE THEY CAN SPEND MONEY. THE USA DOES NO SUCH THING. IN FACT, IN ORDER FOR US CITIZENS TO PAY THEIR TAXES OR BUY US GOVERNMENT BONDS THE US GOVERNMENT MUST FIRST SPEND MONEY INTO EXISTENCE. MORE IMPORTANTLY THOUGH, WHEN THE US GOVERNMENT WANTS TO SPEND MONEY THEY SIMPLY CHANGE NUMBERS IN A COMPUTER SYSTEM (OFTEN REFERRED TO AS “MONEY PRINTING” BY THE MAINSTREAM MEDIA”). THEY DO NOT CALL CHINA AND ASK FOR A LOAN FIRST. THEY DO NOT COUNT TAX RECEIPTS FIRST. THEY SIMPLY CHANGE NUMBERS IN THE COMPUTER SYSTEM. GREECE CAN DO NO SUCH THING.
Now, Zakaria comes close to getting this point right when he says that the USA has no solvency issue, however, he doesn’t connect the dots accurately. He later goes on to say:
“America could face a liquidity problem – that is, it could have difficulty financing its debts and deficits if markets lose faith in it. But, again, let’s be clear: This has not happened yet. In fact, right now the world is lending to America more cheaply than ever before.”
THIS IS ABSOLUTELY NOT TRUE. THERE IS NO SUCH THING AS THE US GOVERNMENT NOT BEING ABLE TO “FINANCE” ITS SPENDING. AND THERE IS NO SUCH THING AS MARKETS DECIDING NOT TO “FINANCE” THE SPENDING OF THE USA. BOND MARKETS AND TAX COLLECTION SERVE NO FUNDING FUNCTION IN A NATION IN WHICH THAT CURRENCY ISSUER IS COMPLETELY AUTONOMOUS WITHIN A FLOATING EXCHANGE RATE SYSTEM. THE IDEA THAT THEY ARE FINANCING OPERATIONS ARE MYTHS THAT REMAIN FROM THE DAYS WHEN THE USA WAS ON THE GOLD STANDARD AND TRULY CONSTRAINED IN ITS SPENDING. THAT ERA IS LONG GONE.
Zakaria goes on to conclude with one salient (though misguided point):
“If we do end up losing the trust of markets, and it can happen, it will not be because they lost faith in America, in our economy and our society, but because they despaired at the country’s selfish and self-defeating politicians.
On July Fourth weekend, that’s a pretty depressing thought.”
Yes, markets could lose faith in America, but not in the way that Zakaria is describing and certainly not in the way they have lost faith in Greece. The only form of insolvency that America could suffer is via hyperinflation and as I have described in detail, there is very little about the current state of the US economy that is consistent with past cases of hyperinflation. Regarding our politicians – well, they’re as much to blame as pundits like Zakaria who push inaccurate messages based on misconceptions about the way our monetary system actually functions.
While the message Zakaria is trying to portray is accurate (that we are different from Greece), the argument is filled with holes that leave the American public doubting whether the USA really is different than Greece. This sort of misconception needs to end as it is leading to misguided policy responses and a destructive widespread sentiment throughout the nation. The fact that this sort of misconception and misunderstanding persists on such a mass level is the truly “depressing thought” this weekend.
Just saw this on the front page of CNN and immediately came here. Glad to see you debunk the piece. Too bad it will get 1/1,000,000,000th of the press coverage that the CNN piece will get.
Great post.
Since the vast majority of people as well as the mainstream media are obviously feeding into this silliness, what is the best way to fade this and wait for the masses to eventually come to their senses? Is it going long Treasuries? Is it short gold (though the market will likely remain irrational far longer than we can stay solvent)?
There has to be a way to turn this widespread fundamental ignorance of our monetary system into a gold mine. What is it?
Never again vote for a member of either the Dem or GOP political gangs. Write in Captain Kangaroo if you have to.
Actually of greater interest is whether you agree with his main point.
http://www.npr.org/2011/06/30/137522219/what-does-a-post-american-world-look-like
Monetary mechanics is just a side show to his thesis …
That’s wrong. This isn’t about the rise or fall of America. It is about the fundamental differences in the monetary systems and how we should diagnose and handle each situation.
Zakaria is the doctor who says you won’t die of the disease you have, but has totally misdiagnosed it. Does the fact that he’s probably right in the end mean he’s a good doctor and saving your life? Or is it more likely to result in prolonged pain due to a misdiagnosis of the real problem?
Did you listen to the broadcast?
His main point is that America is by many metrics slipping badly as the dominant top dog, and it needs to work harder/smarter. TPC has said as much many times, namely America’s over focus on financialization of the economy. I think he uses the Greece situation, incorrectly, as you all have pointed out, only to support the rest of his thesis, not as it’s starting point. It would have been better if he had, used the previously-popular analogy, that the US is the late stages of the Roman Empire.
His main point is that America is by many metrics slipping badly as the dominant top dog, and it needs to work harder/smarter. jt26
Free men work harder and smarter than debt-slaves. Debt-based money has to go! The population should not have to work for bankers.
Charge the good doctor with mal-proctology and demand he reveal where his head is.
Just to clear up a few blog myths, Amerika can go the way of Greece.
This was a public service message.
maybe you could enlighten us with actual arguments behind your claim? or is that too hard?
Ooh, I can help. How America could go the way of Greece:
1) Join the EU (dropping the $ for the Euro in the process)
2) Run up an unsustainable amount of debt.
…
3) Default??
Vote in Jo as President. That should seal it.
Jo,
Your hilariously uninformed posts on this site are always welcome by me. I get a kick out of your inept reasoning and mindset so far beyond stubborn this is no word for it. Thank you. Keep up the bad work (because it makes me chuckle).
One paradigm for debt doesn’t exists in the monetary world anymore than one paradigm of physics exists in the physical world (Newtonian/Quantum). Debt for a currency user is a burden. Debt for a currency issuer is the savings of the currency users – some may consider a convenience.
What is the role of government debt for an issuer? Ultimately, government debt is a means to an end. Debt of an issuer is a tool constrained only by the maximum acceptable levels of inflation (ie. 2-3%) to maximize the goods and services produced within an economy. The goods and services produced should be determined by what other countries are willing to trade for since the cost of importing is exporting. The most logical source of public spending is massive government investment in basic research and development to serve the common good, drive spending, and subsidize development until commercial applications can be sold off to the private sector and employ workers efficiently.
Hey Dollar?
You are beginning to sound like Abba Learner’s (sp?????) functional finance here@!
Shame on you for such constructive thinking!
Guys, the LAST thing you should be concerned about (and I nod my head to P111′s ongoing concerns) is DEBT.
Not right now – but perhaps sometimes soon. Rather, our concerns need to be about debt destruction if the HHs can not delever, HH recover for the PCE to bump back up in a healthy way (==> debt/income ratios come WAY back down), and finally perhaps a “right-sizing” of our consumption-oriented madnass (I mean really? Did you realy NEED to buy all of that stuff????? – C’mon man!!)
Sorry got waylaid by my frustrations with over-consumption by those folks who pregram their DVRs for their fav HBO program on their cellphones. Oh yeh, and the tat’s on folks who clearly can’t afford to waste their money in that way. Frickin’ dismal dude!
Oh TPC
That was a realy good SCREAM (lol – sort of)! Don’t disagree, but like Stphanie Kelton posted recently here:
“Are we being too dense?”
Now, really LOL…
Last thought: Are we Greece? For Pete’s sakes? Are U INSANE? Done here/
What’s this with “government debt”? The Federal government can just spend debt-free fiat into circulation with NO debt.
Who the heck is the government supposed to borrow from? The buck not only ends with government; it starts there too.
@ F. Beard.
You still have to account for dollars even if you don’t have to “borrow” to get them. A dollar is a government liability which is debt. Ultimately, though, government debt is a digital resource that provides infinite capacity to grow the economy within the resource constraints of the real world. Exceeding those real constraints, production capacity for example, will cause price instability and unacceptable levels of inflation.
Until the economic advisors of the policymakers grasp this basic concept we’re all pissin in the wind with a lot of collateral damage raining down on us.
A dollar is a government liability which is debt. Craig Austin
The debt is from taxpayer to government so it is odd to call dollars a government liability. Furthermore you give ammunition to the deficit hawks by calling it “debt”.
Until the economic advisors of the policymakers grasp this basic concept we’re all pissin in the wind with a lot of collateral damage raining down on us. Craig Austin
The MMT folks would be wise to insist that government fiat only be legal tender (in fact as well as law) for government debts – taxes and fees – not private ones. That would completely mute the inflation argument since then only government and its payees would suffer if government overspent relative to taxation. Of course that would mean allowing private currencies for private debts.
“The MMT folks would be wise to insist that government fiat only be legal tender (in fact as well as law) for government debts – taxes and fees – not private ones.”
Read our literature. That’s EXACTLY what we do.
Exactly. Beard, I am sorry, but it’s simply absurd that you’ve been reading this site for so long without grasping this basic point.
but it’s simply absurd that you’ve been reading this site for so long without grasping this basic point. TPC
Well praise be! Sorry but I did miss that point because I’ve been away till recently (generally if I don’t pipe up, I’m not around).
Well, that is very good news!
I just started reading your site. How does the private currency aspect work exactly?
Have you read this?
http://pragcap.com/resources/understanding-modern-monetary-system
Read our literature. That’s EXACTLY what we do. Scott Fullwiler
Link?
Also, do the MMT folks propose to lend money into existence or just (as they should) only spend and tax it?
Could you elaborate on this? Does MMT not care whether the state mandates that its currency be accepted for private debt, just public ones, or does it say that requiring people to accept it in payment of private debts is a bad thing?
Wrong, US and Greece are not much different from a monetary point of view.
Greece is part of the EU with a seat at the ECB. Just as the FED can print and buy government bonds so can the ECB. The FED can print money, so can the ECB.
The difference being that ECB has not yet started printing euros in a big way. There is no truly independent bank out there. The political difficulties to be overcome by the ECB are not so much different than the political wrangling in the US. Eventually ECB will decide to print with the agreement of the politicians and we will find out that just as there is no difference between the ECB and FED, there is no much difference between the Greece and the US.
You just explained how they are different….
No they arent, but you dont get it.
I invest my own money and make a living by it. I have been buying heavily 2 year greek bonds when yields were at 28% and everybody here was screaming the end of the world and will be shorting the euro medium to long term for the reasons I have exposed here.
ECB will print in the end, it is the least resistant path and it will be taken.
Rather than your Chartalist approach that keep repeating ad nauseum that US can never default because of the printing press, I look at things in a pragmatic way. We all know that governments can print money, it is not smth that Chartalists discovered if that is a discovery at all, but what you fail to correctly anticipate is the consequences of such actions.
ECB is owned by the member states (yes, Greece owns part of ECB) and as such it will do what member states decide in the end. That is not so much different than the US situation and the FED.
Operationally, they are not even remotely similar, so yes, they are very much different.
The other critical factor – the ECB has made it clear that they set monetary policy for Germany – everyone else just has to go along with it…
They might be operationally very different but they both print money and buy debt in the end if so required by the politicians. The end result is what matters.
No, they both don’t print money. That’s what you seem to not understand. Greece CANNOT print money….
I think that Casanova is trying to say that it does not matter that Greece can not print money since at the end of the day the ECB will do it for them.
Yes, thematically Greece is like a single State with in the US and it can default but when the worst scenario shows up dilution is always the preferred choice of Governments. Devaluation is nothing new in Europe.
Thanks First for clarifying my thought.
To my great chagrin, some times the Chartalsits are so stubborn and dogmatic as the other ideologues out there.
And as I keep saying, devaluation is not default. If you want to have a debate about whether the USA will suffer inflation then let’s have it. But this default nonsense has to stop in the USA.
“devaluation is not default”.
and ice cream does not immediately melt once out of the the freezer.
Correct, its only a partial and gradual currency default and as GOV spending continues to exceeds there GDP they can chose to choke there economy by Taxation, VAT, duty fees etc or evolve toward a gradual currency default which is always the less visible and politically friendly default.
Devaluation is basically the transfer of a default to the general public.
It’s like “Taxation in Disguise”.
You are right its not default in the traditional way its a more like a swap.
No, this argument is not accurate. If you were foolish enough to believe that inflation is always bad you would have to argue that the standard of living of Americans has declined since 1913. Inflation only reduces our standard of living when it exceeds productive capacity.
“devaluation is not default” – your getting confused
Fiscal optimization requires balancing fiscal deficits at a rate corresponding to currency users rate of saving. Government knows it needs to destroy money through taxes before it can spend in the marketplace to avoid inflation. Government also knows that some users choose not to spend. To maintain a given level of output, government fiscal policy must correspond to the users savings rate. The challenge of the issuer is to spend enough money into the system to displace savings but not enough to exceed it. Government also knows an oil monopolist operates within the marketplace attempting to maximize profits which has the potential to cause general inflation because of oil’s influence on overall price levels.
wait a minute….i say government knows all this but does it really? does a pickle like peanut butter? i don’t know and i’m guessin they probably don’t know either.
“The only form of insolvency that America could suffer is via hyperinflation”.
wrong!
actually, if the US is not legally entitled to incur more debt on 8/2, it will default on its payment due treasuries on 8/4. this is called insolvency!
it will not be insolvency because of a lack of credit, but because of a political problem, but it will be insolvency (not being able to pay your debts as they come due) nonetheless.
i am sure timmie g and ben b hae something worked up that’s real slick on 8/3 to prevent this from happening…maybe a moral obligation advance from the fed to treasury that is not legally enforceable.
but we have an issuance problem, it is a political problem but it is an issuance problem nonetheless!
Don’t forget about the debt ceiling’s pesky conflict with the constitution regarding default.
I have absolutely no idea how to handicap the odds of a technical default through a refusal to raise the debt ceiling. I feel that outcome is quite low, but certainly non-zero. It sometimes concerns me that all of us are focused on our superior underrstanding of our monetary system and then get burned by the reality of political ridiculousness.
I lasted about 45 seconds of Fareed before switching off the box; just long enough to foresee his spiel as another setup for dismantling Social Security and Medicare, because, as God and everyone else knows, deficit investment or taxing the superrich is simply taboo, can’t be done. Sell off the dams, national parks, highways, bridges, schools ad libraries but don’t touch those billionaires’ tax cuts.
Let the banksters have your corpse, and the corpse of the US economy too. I’d love to have a time machine and see what current currency supply terrorists end up thinking after they’ve had their way. The Cheney defense? “No one one could have predicted this?”
Of course. I could also choose to file bankruptcy tomorrow. That doesn’t mean I have to. It’s a 100% political decision.
Don’t tell me your liabilities are greater than your assets!
That’s my point. I am incredibly prudent. It would be ridiculous for me to choose to file for BK. But I could. The USA could do the same thing. It doesn’t mean they have to.
it is not the case that the US could become insolvent; the US will become insolvent unless they do something…given the dysfunctional political situation, an agreement has to be reached in order to avoid insolvency; this is different than having to agree to declare insolvency. big difference.
i give us a 10% chance of actually not raising the debt ceiling by 8/2. probably higher than most people think. the consequences will make lehman look like a walk in the park
The argument that the USA cannot default is specious.
The USA will continue its relentless default by means of dilution.
In fact, it is becomming quite a chore to maintain a rising purchasing power in an asset-class diversified portfolio as the economic and poltiical elites continue to shake the tree.
A game that used to be loads of fun and now become little more than a royal pain in the ass on its way to becomming a struggle for survival.
That’s called inflation. Learn some basic economics. There’s a difference between inflation and a declining standard of living.
The fact that the US issues currency doesn’t mean there isn’t pain ahead for those holding US dollars. All this means is that, instead of defaulting, the government can chose to recklessly create more dollars, and, as a result, reduce the purchasing power of existing dollars with a mere keystrokes on a keyboard.
Do you trust the government not to keep iressponsibly pressing the print button? Even if we don’t get hyperinflation per se, and we just get above average inflation as a result of the govenment’s excessive spending, this is still going to be very painful for those of attempting to save US dollars for retirement.
Again, essentially the government has the power to steal your purchasing power against your will, and their ain’t a damned thing you can do about it except gamble in the markets. Why is it a good thing that the government has a license to steal your purchasing power?
The government is underspending or overtaxing. Have you seen the unemployment figures?
or both
As Thomas Sowell mentioned “In the 1930s, Roosevelt’s administration hired more young men in the Civilian Conservation Corps than in the U.S. Army. It never brought unemployment down into single digits at any point “during that entire decade”. In 1939 unemployment rate was still at 20 percent” Remember “shovel-ready projects”? The “stimulus” money. Government spending kills as many jobs as it temporarily created.
Government can only transfer or dilute wealth it can not create it.
Government can only transfer or dilute wealth it can not create it. first.
Not quite. The US Government could prevent the destruction of wealth that the banking system is currently engaged in.
How? By bailing out the entire population with new, debt-free fiat is how and by putting banks out of the counterfeiting business at the same time.
When some one is robbed the robber(s)needs to pay back. Printing new money to pay him or them back is an illusion and a new collective robbery not a solution.
I think there is a way to bailout out the entire population without inflation risk:
1) Forbid the banks from creating any more “credit”. All loans thenceforth to be of existing money with matching maturities on deposits and loans.
2) Every month send every US citizen, including savers, an equal check of fiat equal in total to the amount of credit paid off the previous month. Continue till all credit in the system is replaced with fiat.
The result would be a debt-free USA with no increase in the total money supply (base money + credit).
THe ECB will ultimately bail out the PIIGS via monetary policy; fiscal transfers from north to south are no longer politically feasible. Once Draghi takes over from Trichet, this is the direction the Euro will go. If it doesn’t, then the Euro as presently constructed will cease to exist. The Germans will have a choice: accept a much weaker Euro and an even greater trade advantage than they already have, or face a return to the D-Mark and a very expensive currency that will destroy their mercantilist advantage that they have worked so hard to create. Casanova’s bet on Greek debt is a good one.
By the way, when Richard Nixon (a Republican) closed the gold window, the USA defaulted on its obligation to redeem its debts to foreign countries in gold. If it hadn’t, Fort Knox would soon have been emptied (e.g., the French were asking for physical delivery). The world didn’t end simply because Nixon acknowledged that there were far too many dollars in existence for the gold standard dollar to continue to exist in international relations. As Nixon’s Treasury Secretary said, “the dollar is our currency but your problem.”
Not much has changed in this regard in the ensuing 40 years, and so if the Republicans do in fact decline to increase the debt ceiling, the world will not end (unless sectoral balance equations are repealed and the world can find a new reserve currency).
JWG:
I agree with this assessment. The timing is going to be based in an internal evalulation of how much pain the Greek public will take (e.g., reduced benefits and assets selloffs) before the situation becomes too politically risky.
EVEN AS AN ISSUER OF MONEY WE HAVE TO FACE THE MARKETS. THE RELENTLESS DECLINE OF THE DOLLAR IS THE MARKET FEEDBACK SAYING THAT EVEN A MONEY ISSUER HAS TO HAVE A DISCIPLINE. WE ARE FOLLOWING THE FATE OF GREECE, BUT FROM A DIFFERENT DIRECTION. THE MARKETS ALWAYS WIN.
Not quite. It’s the market saying you can’t have 40+ years of trade deficits (which typically result in government deficits). A declining dollar over time should eventually close the trade gap (theoretically). There is no reason for any country to have endless trade surpluses or deficits as all world trade must balance.
Martin Wolf had a nice one on sectoral balances and the need for the private sector to deleverage last week:
http://www.ft.com/cms/s/0/28e2d3e2-a1b5-11e0-b9f9-00144feabdc0.html#axzz1R7YoiY00
The USA is definitely not Greece, because it is an issuer of a currency. However there could be a situation in the near future, where nobody except the Fed is willing to buy treasuries. This will corrupt the US-Dollar as a currency and raise import prices for the US. Raising commodity prices will affect the US-economy negatively, while raising prices for imported consumer goods will increase the demand for US-produced goods within the USA.
And what will people do with their rising level of dollars? Remember the government spends first. Bond sales are an asset swap that happens after the fact.
America has a true debt to gdp of 500%. They are in a worse situation than Greece curency constrained or not
Helix, I assume you are referring to so-called “unfunded liabilities”, the favorite topic of the fiscal fear mongers. If I defined debt that way, I’d be bankrupt, too.
No because you most likely have real assets against your loans.
The unfunded liabilities have intangible receivable. If you think that those liabilities will be paid with a valuable currency you are in for a surprise.
It simply will not be paid in the currency it was promised to be paid in.
The liability will be diluted at your expanse.
The validity of the public debt of the United States, authorized by law… shall not be questioned,” reads the 14th Amendment.
The Federal government’s spending obligations are now mandated by law (agreed upon by the legislative branches, signed by the Presisdent). The debt ceiling is nothing more than an artificial artifice….to somehow give the appearance of fiscal responsibilty.
Nevertheless, in instances such as this (approaching August 2nd), it is an unconstitutional roadblock.
The Obama administration should make it clear that intends to challenge the legitamacy of the debt ceiling in the courts.
America and the EU is running out of time. This is not simply about whether both entities can continue to print money in order to support expenditures, this is possible. It is however about extending for a time the fantasy that busts do not follow booms either in severity or duration. Perception is the fragile foundation of an economic order. Bubbles are like religion…either you believe or you don’t and once you don’t their is ‘hell to pay’ and the fear of hell is enough to continue the bubble.
What do we look for in order to determine whether we continue to deceive ourselves? We simply need to be objective and realistic about how we are valuing assets. Everyone believes that corporations are undervalued and they also beleive that real estate is fairly valued on the books of major financial institutions and the value of derivatives that depend on real estate for its values. That is simply delusional.
We are reliving 1637.
2011 hasn’t been a good year for tulips, true.
In regards to the Tulip Mania of 1637; it was followed by a severe depression. After the ensuing recovery, robust Dutch economic growth continued on. The depression cleansed the system of irrational investment. The problem we have today is that we have had two Tulip Manias in a row, the stock market bubble of the 90′s and the following real estate bubble of the 00′s. But unlike 1637, governments are preventing the rapid cleansning of irrational investment though creation of cheap cedit and monetary expansion. The result is that we just stretch out the depression and hop from one asset bubble to another. While this might be great for people of means who have the luxury of time and money on their hands to speculate, it is very bad for the common working man tying to get ahead who has neither.
As long as gold is priced in dollar, it is a comodity, a very speculative comodity. When people ask pelts and barrels of whiskey for their gold, the experiment in the token system fails.
This does not mean that other currencies may nor appreciate against dollar. Also, imports could become prohibitively expensive here and interest rates could go way high (during Reagan administration). The critical thinking requires us to consider how to avoid breaking points in all fields, economics, social, politics, and, wars. A breach in any of these will be the catalyst for the failure of dollar token system.
Government debt of a currency issuer is not remotely analogous to household debt. Why? Well, for starters, no one in a household is the “monopoly producer of money”. Government debt of a currency issuer is the savings account for currency users as a matter of accounting. The issuer knows that users choose to save to defer spending at a later date or to chase profits. The issuer also knows to maintain price stability the issuer must destroy money with taxes before it can create new money to spend. The issuer knows that to maintain a given output the issuer must spend if users decide to save.
The issuer knows that the government debt is a means to an end. Government debt is a tool constrained only by the maximum acceptable levels of inflation (ie. 2-3%) to maximize the goods and services produced within an economy. The issuer knows that the goods and services produced should be determined by what other countries are willing to trade for since the cost of importing is exporting. The issuer knows that the most logical source of public spending is deep R&D investments to drive demand and subsidize next-generation technology until commercial applications can be sold off to the private sector to employ workers efficiently.
These are the things a currency issuer knows….don’t they?
one other thing. the beauty of government debt it is a digital resource that provides an infinite capacity to grow the economy. The only limitation is the rate it can grow to maintain general price stability and prevent unacceptable levels of inflation.
One point no one seems to recognize is that the market can “destroy money”. As housing prices drop equity which is a form of money is lost. The definition of inflation is too much money chasing too few goods. At this point in time no matter what the Fed has done we have too little money and too many goods. With stagnant wages, rising unemployment, falling real estate values the Fed as a lot of room to print. The real danger as pointed out by Reinhard and Rogoff is a psychological one, the loss of faith in the currency. When the money multiplier starts to expand significantly than will have real currency problems. If we get a double dip which is looking more and more likely than the real problem will be deflation. (As you see I agree with David Rosenberg)
Credit and equity bubbles “destroy money”. The users that are overextended are left on the hook until bankruptcy where their liabilities are then removed. When your allow your banking sector to sell off their loans you’ve incentized them to make loans they are no longer accountable for. Banks have no need to sell off loans because the currency issuer is the monopoly producer of money and can provide all the capital they would ever need. Banks should only be able to do what they are suppose to do – credit analysis, lend, and take deposits.
Bubbles are the result of poorly structured banking institutions. Design the right system and you’ve’ removed 95% of the systemic risk. I guess their is always a small risk we somehow start embracing a culture of deception.
Banks have no need to sell off loans because the currency issuer is the monopoly producer of money and can provide all the capital they would ever need. Craig Austin
Not just no but hell no. There should be no “lender of last resort”. If banks over leverage then they should just go out of business. Furthermore you conflate “money” with “capital”; they are distinct.
Government is the lender that defines the system. All currency user assets (banknotes, deposits, treasuries) are government liabilities. The issuer lends to private banks who then lend to businesses and households if banks overextend themselves they should go bankrupt. The way to hold them accountable is force them not to sell off their loans
The issuer lends to private banks who then lend to businesses and households if banks overextend themselves they should go bankrupt. Craig Austin
No. The Federal Government should just buy goods and services with its fiat and completely ignore the banks other than to punish them for fraud and insolvency. The government should not borrow money or lend money; it should just create, spend and tax its own fiat. Anything else begs for corruption and instability.
Governments DO NOT need banks. Nor does the private sector need banks. All the private sector needs is the liberty to create its own monies for private debts.
F Beard
how do you think banks get money? the currency issuer is the monopoly producer of money. the issuer lends to the banks.
look we need banks. the only question is how to structure them to prevent the systemic risk they are currently introducing into our financial system. banking is a sacred institution because bankers are using other peoples money to run a business – or a bank i should say. the question is how do you avoid conflicts of interests and moral hazard and all that good stuff.
how do you think banks get money? Craig Austin
Ideally the US Government would just spend money into circulation buying goods and services and tax some of that money out of circulation. That money would be deposited into banks. From there that money might be genuinely lent out (100% reserves) or a bank might attempt to leverage it (< 100% reserves). However if a bank attempted leverage then it would be completely on its own if it miscalculated with no lender of last resort.
the currency issuer is the monopoly producer of money. Craig Austin
The monopoly producer of government money. The private sector should be free to create its own monies for private debts.
the issuer lends to the banks. Craig Austin
Nope. The Federal Government should simply spend and tax its own fiat. Let the banks get a hold of that money if they can by honestly borrowing it from government workers, contractors, the military, etc. The banks should not be able to borrow from the government; that is wickedly absurd.
look we need banks. Craig Austin
No we don’t. The Federal Government can simply spend and tax. As for the private sector, let it either genuinely borrow existing money or issue new common stock to finance itself.
the only question is how to structure them to prevent the systemic risk they are currently introducing into our financial system. Craig Austin
We’ve been trying for over 300 years. Government backed banking is inherently dishonest and unstable.
banking is a sacred institution because bankers are using other peoples money to run a business – or a bank i should say. Craig Austin
That’s a laugh. Bankers are government backed counterfeiters who steal purchasing power from all money holders including and especially the poor. Usury is the least of their sins.
the question is how do you avoid conflicts of interests and moral hazard and all that good stuff. Craig Austin
Indeed! An excellent place to start is separate government and private money supplies per Matthew 22:16-22 (“Render to Caesar …”).
Why? If you don’t offer insurance on deposited money you create distrust within the system. Why would I stick money in a bank…I have no idea how honestly of effective the bank is run. Why should i pay the cost of their failure? I haven’t risked anything. All I’ve done is stuck my money in a bank. Investing is taking a risk. Saving govt assets should never be a risk. Design the system right, hold banks accountable, and you’ve eliminated much of the systemic risk.
The government could offer a money storage service that made no loans and paid no interest. That would be 100% insured.
“The government could offer a money storage service that made no loans and paid no interest. That would be 100% insured.”
Uhh…that storage service is called a government insured private bank. you obviously have a serious distrust for banks. banks work fine when they are structured correctly.
look if your running a sales organization and all you pay is commission on new sales and not existing accounts you have structured your commission structure wrong. your going to lose existing customers.
structure the banks in way they are inherently stable and your on the way to remedying that distrust thing you got going on against “banks”
just because are banks failed doesn’t mean we throw them away…just design them better.
Uhh…that storage service is called a government insured private bank. Craig Austin
As soon as the government insures a private bank then it has a very strong incentive to not let it fail. But banks must be allowed to fail to keep them honest.
Of course I distrust banks. “They were conceived in iniquity and born in sin”. They lend money they doesn’t exist until they loan it for interest that never exists in aggregate.
Like I said, government has absolutely no need for banks. If the private sector desires them then let the private sector insure them. Government has no legitimate business in the private money business.
And don’t doubt for a minute that the private sector will be able to find money solutions. The corporations have been spoiled by cheap loans from the counterfeiting cartel and have used them to outsource and automate their workers jobs away. That practice has to stop.
“As soon as the government insures a private bank then it has a very strong incentive to not let it fail. But banks must be allowed to fail to keep them honest.”
Look your distrust is helpful in the sense that distrust is exactly what is needed to design a structurally sound bank. Not sure but I think the “moral hazard” term came out of the S&L scandal.
“Cheap loans” is what defines contributes to the success of a nation. “The most important commodity price in society is the price of money” from one of Bernsteins books. The quote stuck with me because it’s true. If you can get money cheaper than your competitor you have a competitive advantage.
Besides preventing banks from selling off their loans another good structural change would be to require real assets as collateral. The change would reduce a lot of the non-productive speculation that is taking place. If someone wants to speculate fine…just let them do it with their own money instead of borrowed money (belonging to someone else)
As TPC once quoted: “History doesn’t repeat itself, but it does rhyme.” by Mark Twain
“Raise governement debt solution” was figured out in 1933, but never put into practice.
http://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf
http://en.wikipedia.org/wiki/Debt_deflation
http://wherestheinterest.com/
America can go the way of Greece. When (not if) “”investors”" demand higher interest rates then the US is toast. Like Greece is going to be toast. And the FED is about to run out of financial rope especially when interest rates are going up.
Again, our TPC hasn’t got a clue of the scope of US monetary policy. And that’s why he won’t be appointed to become the next Treasury Secretary.
And TPC doesn’t know how the US invasion of Iraq and the chronic Current Account Deficits (since the mid 1960s) intertwines with US monetary policy and e.g. higher or lower interest rates.
TPC fails to understand that foreigners who hold all those dollars don’t pay taxes in the US, so that constrains the ability for the US federal government to spend that money AS WELL.
And our TPC has to understand that in the 2nd half of 2008 the US continued to run Current Account Deficits in spite of a rising USD(X). Those USDs didn’t flow back into the US. And that forced the US/FED to “”print”" even more USDs. but contrary to the belief of the (hyper-)inflationists that won’t lead to (hyper-)inflation until the entire US creditmarket has been destroyed.
@Willy2
The issuer is the account of it’s currency users savings in banknotes, deposits, and treasuries. Its a digital record of account. There are no constraints. Look if you want to understand how an iPod works you don’t listen to music. You try to figure out how the data is being manipulated to produce the music. Money, for all practical purposes, is digital and requires the exact same approach. If you want to understanding how monetary system works you need to understand it on a binary level. You need to understand how government liabilities flow through monetary operations. Most the academic community continues to trip over itself because of their fundamental misunderstanding of our monetary system.
There’re constraints. There has to be someone who wants and can take that digital money. When there’s no one “”the other side of the trade”" then the whole system falls apart like it did in the 2nd half of 2008.
That’s called hyperinflation and it’s most certainly NOT what happened in 2008….
Your right willy2 i spoke to soon. I meant to say fianancial constraint. So let me try to clarify. Government debt of an issuer is a digital resource that provides an infinite capacity to grow the economy within the resource constraints of the real world. Exceeding those real constraints, such as production capacity, will cause price instability and unacceptable levels of inflation.
Do you know what a current account deficit is? No, otherwise you would not have stated that “Those USDs didn’t flow back into the US”
If there is a current account deficit there must be a capital account surplus. Period.
Wrong. There’re a lot of USDs floating around outside the US. As a lot of speculators/investors sold their loans/bonds/stocks they sold their securities and bought cash (Euro or USD). The only reason the USD went up against e.g. the Euro was that a lot of securities are denominated in USD. So, the demand for USD was larger than the demand for e.g. Euros.
But that does not automatically mean that those USD flowed back into the US.
We saw the same thing in Eastern Europe. A lot companies/households over there borrowed in Euro or swiss francs because of the lower interest rates. So, when those loans securities were sold the demand for e.g. Euros was larger than the demand for e.g. polish zloty’s or hungarian forint. And the Euro went up against the forint and/or zloty.
More over the US is “”hell bent”" on maintaning a Current Account Deficit. When (not if) that Deficit turns into a Surplus then the days of the US are numbered AS WELL.
I am having some problems with this idea that; according to MMT, robust economic expansion can be best be created through government spending because it sort of flies in the face of the economic history of the United States. Prior to 1838 credit was issued by a central bank ( the first and second federal banks). When Andrew Jackson eliminated the central banking system in 1838 we went back to the old colonial system whereby private banks (and some states) issued both currency and credit (backed by gold in their vaults). The Civil War was paid for by creation of the Greenback and through inflation. The Greenback then became the national currency, issued through the Treasury. It wasn’t until the creation of the Federal Reserve in 1913 that both money and credit became the sole job of the Federal Government. In the golden age of America between the Civil War and the First World war, economic growth averaged between 10 and 15% GDP and yet combined Federal and State spending comprised only about 5% of GDP.
“robust economic expansion can be BEST created through government spending”… I do not think MMT says anything like this. At the very least it wouldn’t use the terms “best”
MMT is built upon 3 foundational components… 1) Neo-Chartalism (operations of a fiat currency); 2) Functional Finance (how the banking system works) and 3) Consistent with National Accounting.
1) Basically say the US government is only limited in its spending by the real resource constraints of the economy (there are no fiscal constraints).
2) Key component of function finance is that banks create loans and deposit at the same time. Deposits/Savings do not generate loans. Banks are capital constrained not deposit/reserve constrained.
3) (key accounting identity) Total Government Net Spending MUST EQUAL Net Savings of Private Sector + Net Savings of Foreigners (Capital Account/Inverse of trade Deficit)… (another key accounting identity is Spending = Income
In 2010 the US trade deficit was about 3% of GDP and Net Private Sector Savings was about 7% of GDP AND the US budget deficit was 10% of GDP!!! AND the US economy was still short spending by about $2T (to full employment). MMT say that there is ZERO fiscal constraint to the US government to put everyone who wants a job back to work. The economy has about $2T in excess capacity sitting idle waiting for spending. Why can’t or doesn’t the government fill that gap?
As the private sector heals its balance sheets the economy wont need that level of support by the government. It’s not that the government is the “best”, but the government has the TOOLS to counter balance shocks to the system.
“I am having some problems with this idea that; according to MMT, robust economic expansion can be best be created through government spending because it sort of flies in the face of the economic history of the United States.”
I’m no expert on MMT, but I’ll try to help.
“It wasn’t until the creation of the Federal Reserve in 1913 that both money and credit became the sole job of the Federal Government.”
This is somewhat vague – perhaps not correct. The Federal Reserve was acting as a lender of last resort at that point and exercising some control over interest rates, but it and the government faced the constrictions of the gold standard.
“In the golden age of America between the Civil War and the First World war, economic growth averaged between 10 and 15% GDP and yet combined Federal and State spending comprised only about 5% of GDP.”
First of all, MMTers – and all the post Keynesians, Cambridge Keynesians, new Keynesians, old neo-Keynesians, and zombie Keynes himself – would not say that appropriate fiscal demand management necessarily means government spending must occupy a large percentage of GDP, on average. Having a halfway decent society may require that, but all that demand management requires is the “right” level of government spending in excess of taxes. Absent context, they’d say that a 5% average isn’t terribly meaningful and, however unlikely, could very well reflect a successful full employment policy.
As for the growth rates, I do not get these figures. I get average real GDP growth of 3.74% for the period 1867-1914 – I’m leaving out 1866 because demobilization is an unrepresentative drag on the general economic performance of the system. For comparison, the period 1947-2011 – post true gold standard – I get 3.20%. Less, but the difference is not stark.
But of course, there was tremendous immigration during the late 19th century. If we look at growth in real GDP per capita, here are the relevant figures for the respective time periods: 1.58% and 1.95%. Fiat currency (Bretton Woods convertibility aside), central banking and demand management win out.
Regardless, there’s more to growth than good macro management. I would contend that the US and western world enjoyed the benefits of the second industrial revolution in spite of that era’s monetary system, not because of it.
Govt spending doesn’t create economic expansion. It merely allows it to occur because we transact in the legal tender of the USA. It’s like scoring points at a football game. You can’t score points if the football stadium doesn’t make them available to be marked down as points. you can claim you scored points, but they won’t be official until the stadium actually recognizes them. The US govt works the same way.
Cullen – Upon first reading your statement it sounded right. “Government doesn’t create expansion it merely allows it to occur.” But now that I think about it I’m not so sure. If currency users save their dollars in banknotes, deposits, or treasuries then the government can displace those saved dollars and actually create expansion. What do you think? Sound right?
I should be more specific. When the govt spends it can most certainly create real growth. Some remarkable inventions have occurred due to govt. But more important, they allow pvt sector expansion to occur by giving us the currency with which we must transact. Govt must name the thing that is the unit of account. And if they don’t make it available there is no way we can use it to expand. That was my more basic point….
When The U.S. Paid Off The Entire National Debt (And Why It Didn’t Last)
http://www.npr.org/blogs/money/2011/04/15/135423586/when-the-u-s-paid-off-the-entire-national-debt-and-why-it-didnt-last
then i would recommend – http://moslereconomics.com/mandatory-readings/
http://www.npr.org/blogs/money/2011/04/15/135423586/when-the-u-s-paid-off-the-entire-national-debt-and-why-it-didnt-last
It would be good if USA could default and cleanse the malinvestment and corruption once and for all. As it is, USA is destined for decades of slow degradation and of wasting its wealth until it becomes another Bristish empire. At least Brits got good museums and theaters out of it.
This is so exhausting. I think the problem is that people – even those without obvious callouses on their knuckles – simply cannot grasp the fundamental differences between money within and without currency unions. For visceral clarity, let’s replace “Euro” with a commodity in all future discourse.
Hyperventilated Claim: “Greece and America are both running enormous deficits! If it can happen to Greece, it can happen here!”
Clever Rejoinder: “We owe numbers. Greece owes pork bellies. Numbers are an abstract concept, so we can probably get more. Greece is having trouble with the pork bellies.”
Deflated Ego: “Oh.”
It makes all the difference in the world whether you have an endless supply of pork bellies or not…..That fact that people disregard this notion is more than absurd.
you could call it endless supply of pork bellies or you could call it a digital record of account of all the government liabilities that correspond to the currency users’ savings in banknotes, deposits, and treasuries in order to clarify any misunderstandings
What is wrong with Americans. Each time they discuss the economics of the US, they are either proud that they have the licence to print money or a curse for being given that privilege.
Glaringly, most US self profess economists do bother to clearly explain that the dollar, as an international currency, needs to be monitored for liquidity. The printing of the dollar is part of it.
So, whatever monetary policies adopted by the administration will ALWAYS take into consideration the impact of those policies have on the world’s economic health, not just the US. Anything that’s done to undermine the world’s economy is not in the interest of the US, even if it favors them in the short term.
That’s the reality Americans. Wake up!
America has done more for the global economy than any single economy in the last 200 years. It’s simply absurd to come and say that we are undermining the rest of the world via our policies….
Now, let talk about your criticism of Zakaria’s article. Essentially, what you say is that US CANNOT default in its sovereign debts because its financial setup is basically different. Now let’s be technical: A Default is where you cannot met repayment of a loan when it falls due. Greece is facing such prospect. It can’t print money to pay its loans because it in Euro Zone. Only the ECB can. So, there is a central authority to decide. They want Greece to borrow more to pay its debts (a rollover, a bailout, whatever its called as long as its not technically a default).
Now read this news article quoted from REUTERS:” …The Treasury Department has warned the country will face default if Congress does not lift the $14.3 trillion debt ceiling by August 2. That could push the country back into recession and upend financial markets across the globe.”
Now, the TRILLION DOLLAR QUESTION: Can America deflault? Like going the way of Greece? YES IT CAN, if the DEBT CELING is not approved by CONGRESS. So the CONGRESS is the authority to decide. So, technically, US can potentially default.
STILL cannot see the argument? It’s on the same premise as yours. Don’t be in self denial, please.
Strass Kahn
You’re in agreement. Read more thoroughly. Congress can default for political reasons, but not monetary reasons. We CAN pay, but whether we WILL is up to the boneheads we elect.
I have said this 1 million times. The USA could CHOOSE to default….Please read my work and familiarize yourself with it before you make very poor attempts to criticize it….
Technically probably true but it doesn’t hurt that all the european and asian countries bomb themselves into oblivion about 60 years ago on the cusp of one of the largest technological waves in human history…so far to date at least
Cullen – America has been shattered by monetarism – it does not matter whether you have a effecient means to raise money if you do not have the men with the imagination to use it.
America is choking on its own vomit now – this process has been going on for nearly 50 years with no respite , there is not much human capital left.
I have never seen Dr Zubrin so broken by it all – the poor man is distraught
Fighting for a vision in a world populated by Eloi & Morlocks – completly pointless I am afraid.
http://www.youtube.com/watch?v=iGv64mFJ2E8
Money is only a tool – if it cannot be used effeciently the economy will atrophy.
@willy2
“More over the US is “”hell bent”” on maintaning a Current Account Deficit. When (not if) that Deficit turns into a Surplus then the days of the US are numbered AS WELL.”
You don’t know what a current account deficit is do you? I find Mark Perry to be a bit of a nut but even he can’t get this wrong:
http://seekingalpha.com/article/275256-u-s-trade-with-the-rest-of-the-world-is-always-balanced
Your reply proves my point. Foreigners have a choice what to do with their USDs. Buy USD denominated stocks, bonds, real estate, T-bonds, Agency paper or ….. hold USD in cash. And with the 3-month T-bill rate so low there’s no penalty to hold USD cash any more. Ultimately foreigners even can exchange their USD for e.g. Euro’s.
In the 2nd half of 2008 foreigners (mainly central banks) ditched their Agency paper and that was the last straw on the back of the camel called Lehman Bros. In that respect Lehman Bros. was the Kreditanstalt of the USA. Foreigners DO have a choice. And if they decide to ditch their T-bonds or dramatically reduce the average maturity of their T-bonds and/or go back to cash then especially (long) US interest rates WILL go through the roof. And that’s why the FED can’t control US interest rates. That’s why the US is dependent on the kindness of strangers. And that’s something even TPC doesn’t want to admit.
More over there’s difference between a Trade deficit and a Current Account Deficit.
And the article of Zerohedge also proves why a US Current Account Surplus is detrimental for the US. Then the amount of USDs abroad decreases and foreigners are forced to sell their USD denominated assets. Like e.g. T-bonds. And when (not if) that happens then US interest rates will go through the roof as well. Comprende ?
The article descibes the situation in the 1st quarter of 2011 when the silver-gold ratio continued to increase. We’ll have to see what the 2nd, 3rd and 4th quarter brings. When the silver-gold ratio – IMO – will go/break dwon.
You haven’t shown why contention A”
“Foreigners DO have a choice. And if they decide to ditch their T-bonds or dramatically reduce the average maturity of their T-bonds and/or go back to cash then especially (long) US interest rates WILL go through the roof.”
…offers any support for contention B:
“And that’s why the FED can’t control US interest rates.”
There’s absolutely nothing in the portfolio choice of foreigners that impinges upon the ability of the Federal Reserve to announce an interest rate for any point on the yield curve and meet it, if it so chose. Start shorting 5 year Treasurys and someone at the open market desk in New York will get a phone call.
“That’s why the US is dependent on the kindness of strangers. And that’s something even TPC doesn’t want to admit.”
It’s not the kindness of strangers. It was a desire on the part of foreign countries to amass dollars to avoid ever having to rely on the IMF and to pursue an export driven development model. Buying interest yielding assets was and is the only logical choice once you’re sitting on a pile of dollars.
The keywords are “”Currency Reserves”", “”Commodities (like e.g. oil) priced in USD”" and not “”IMF”". If e.g. all around the world oil were to be priced in Euros starting today then the US will be toast tomorrow. Then US interest rates WILL go through the roof and the USD down the drain tomorrow.
And I still haven’t read one argument that changes my opinion. Neither from TPC or in the comments.
Again I would recommend the readers of this blog to visit the website of mr. Michael Hudson. He has a much better grasp on how the entire financial system works. The system is simply too complicated to explain this in the comment section of this blog.
http://www.michael-hudson.com
I’ll crush this myth of yours in the next few days….
@willy2
i read hudson awhile ago and yes he had a unique take on things that presented some interesting ideas (FIRE economy) but he didn’t remotely offer a working explanation of the entire financial system. MMT unquestionably has the corner on that market.
i don’t know the guy but his writing packs so much negative sociological baggage that it’s no wonder he’s marginalized by the mainstream. i haven’t ready his stuff recently so maybe he’s changed.
Hudson has worked as a balance of payments expert for Chase Manhattan in the late 1960s/1970s(/1980s) and that’s how he discovered how the US operates in the world and benefits from it. And that’s how he started to “”dislike”" the financial elites from Wall Street as well.
From time to time he’s indeed extremely negative but – IMO – he is spot on concerning a number of important things. Like the notion of the FIRE economy.
You don’t understand that if foreigners buy US stocks with their USD instead of USTs, the seller of the stock decides to switch to USD. He then has no choice than to buy USTs if he wants a riskless return on his USD.
The USD don’t disappear if foreigners buy US stocks. Buyer and seller EXCHANGE USD for stocks and vice versa. That’s why it is called exchange.
While the FED does not actively manage every point on the yield curve, please OPERATIONALLY explain how they can’t rationally manage each point if they chose too? If every foreigner sold it’s treasuries all it means is that foreigners have chosen to change their liquidity preferences and that is 100% within the FED’s capabilities of managing. That’s all (or almost all) the FED is capable of doing anyhow, managing liquidity via interest rate changes.
Good piece. I saw the article too and came here
I was wondering Cullen, how did the Euro get out there then? Since the US needs to spend money into existance and create it before we buy bonds/pay taxes; did they “spend money into existance” for the Euro too before they could pay taxes/buy bonds?
How does Europe differ from the US in that way? How does that original money creation differ between an issuer/user?
Glad you asked tom….i’m putting together a website to explain the difference without all the jargon getting in the way. hey willy2 it wouldn’t hurt for you to come take a visit also. no offense but your blowing alot of hot air.
DollarMonopoly.com
“”Blowing hot air”" ? Are my thoughts a bit “”too original”" for you ? Or don’t you like the consequences for e.g. the US ?
did you read it willy because your getting confused. If you want to understand how an iPod works you don’t listen to music, you try to figure out how the data is being manipulated to produce the music. Money, for all practical purposes, is digital and requires the same approach. If you want to understand how money works you need to understand how it flows through the system on a binary level. From an operational perspective, a dollar is nothing more than an on/off switch, it either exists or it doesn’t. The whole enigma to money, and the economic system for that matter, is how money is created and destroyed by the issuer. Most the academic community continues to trip over itself because of their fundamental misunderstanding of our monetary system.
Cool site, but you should have called it Monopoly Money, lol.
thanks but the domain was taken. dollarmonopoly was all i could get
Craig,
Seriously, that is a great site with some nice, simple diagrams that should help bring the MMT message to the masses. It is wonderful to see the growing number of MMT sites popping up. I hope it means that MMT is gaining in popularity. Otherwise, all these sites will be competing with each other for the same limited audience!
BTW, this site is by far the most popular if the number of commentators is any indication. Congrats, Mr. Roche.
Thanks! I appreciate it.
Craig – I’d be lying if I said I read everything in detail, but what I saw was great.
Craig – Cullen… I one of the issues I’ve noticed over time is that many newbies and naysayers confuse money with wealth. I’ve been mentally toying around with a piece on it, but I think its a critical component for swinging some people. Too many people think there savings (surplus money) makes them wealthy and they don’t like the idea that the government (in their minds) can make anyone wealthy by creating money. While anyone who truly gets MMT knows that money is not wealth, some people I think need this addressed directly and head on or they wont be won over.
Thanks Adam. It’s a work in progress. I’ve been piecing together Warren work to put the site together. This weekend someone pointed me to Cullen’s MMT page which was immensely helpful. In fact, I wish I would of started here because of how broad of an overview Cullen has provided. I’m not an economist of financial guy so I’m trying to write for a different crowd. My stuff is still rough but overtime it should get more concise. My background is actually online marketing so once the content is polished I’m curious to see what happens once the next phase kicks in.
adam – the thing that confused me for the longest time was the relationship between the real economy and the financial economy. When i realized the financial economy was made up of two different types of financial securities: issuer-created securities (banknotes, deposits and treasuries) and user-based securities (everything else) things started to click for me.
I explain the distinction in my treatise….
Sorry, its been so long since I read it I forgot. Anyhow, its one of those things way too many people just can’t seem to let go of.
The first euros were spent into existence back in 1999 when the eurozone countries ‘sold’ their existing currencies to the ECB for euros at the agreed upon exchange rates. (Does the ECB record these old currencies on its books as an asset? I’d be curious to know, not that it much matters).
Where can I go to read about having two curriences, a public one and a private one? What’s the purpose? Who would benefit and who would lose (and therefore oppose such a move). How would a private currency get into circulation?
Also, why does the U.S. government on to set interest rates on their bonds? (Hit its target rate, as CR deems it.)
“Where can I go to read about having two curriences, a public one and a private one? What’s the purpose?”
I don’t really think there would be. Money needs to be accepted. Having the government issue it, demand it and enforce its acceptance for the cancellation of debts makes it incredibly appealing over alternatives, be they issued by a private institution or simply a commodity.
“Also, why does the U.S. government on to set interest rates on their bonds? (Hit its target rate, as CR deems it.)”
To influence other interest rates, in the hope that this will reliably expand or contract private sector investment and thus GDP growth and inflation. As far as I can tell, the conclusions of most MMT writers is actually quite similar to those of Keynes, but springing from a rigorous national income accounting perspective: fiscal policy should be used for demand and inflation management, and the interest rate kept low and stable.
To add to Adams post above: New Keynesian economists and policy makers influenced by their thinking (most of the Fed) aren’t really focused on the money supply. The NK models just have a Taylor rule setting the interest rate – in traditional IS/LM terms, their LM curve is flat. Aggregate targeting was a dismal failure, and horizontal money does what it wilt.
I meant “government want to set …”.
Because policy makers are ignorant of how the system actually works. They have chosen to manage the supply of money and aggregate demand via changes in interest rates. Instead of directly managing spending/incomes via taxes and government spending they indirectly manage the demand for credit (and hence aggregate demand generated from borrowing) via interest rate changes. Extremely inefficient to say the least.
…just to be clear…
I don’t mean to inferring the FED is controlling the money supply directly by changing interest rates. The FED for the most part influences the money supply by influencing bank credit expansion which is horizontal (credit) money supply creation (or shrinkage).
@willy2
you are seriously confused but you are an original thinker.
A current account surplus will be bad! That is original. Try telling that to Norway and their SWF with several hundred billion dollars.
try reading this:
http://pragcap.com/resources/understanding-modern-monetary-system
“Cheap loans” is what defines contributes to the success of a nation. Craig Austin
Those “cheap loans” come at someone else’s expense. The purchasing power for those loans, so-called “credit”, is stolen from all money holders including and especially the poor.
Our money system is doubly condemned; it is based on usury between fellow countrymen and theft. It is no wonder that it is impossible to make it work for long.
@Beard
okay you have officially lost me. i’m looking at your questions as practice to work out some of my ideas but at this point i don’t know what your talking about. The world is not going to end. We’re not doomed. We’re not facing the end days. We’re just going through some growing pains during this colossal blunder of the mainstream economic profession.
It’s painfully comical how much confusion, fear, and distrust is starting to collectively bubble up. I think MMT is so piss poorly explained that it really needs a pair of fresh eyes to reframe the entire subject. Sorry – MMTers. Cullen I just discovered your blog this weekend so your naturally excluded from that ridiculous generalization.
i’m looking at your questions as practice to work out some of my ideas but at this point i don’t know what your talking about. Craig Austin
I like MMT because it honestly admits that government money is backed by force – the government’s taxing power. But why in heck should government force be extended to private debts? Government should have nothing to do with managing private money supplies.
As for “The End”, the Fed is the admitted cause of the Great Depression and thus WW II. Further monetary incompetence could easily be the cause of GD II and WW III.
But thanks for engaging with me. Good luck with explaining MMT to the masses. We are in danger of pointless and cruel austerity.
Craig,
“It’s painfully comical how much confusion, fear, and distrust is starting to collectively bubble up. I think MMT is so piss poorly explained that it really needs a pair of fresh eyes to reframe the entire subject. Sorry – MMTers.”
Hmm. I’m not sure if it’s poorly explained so much as it’s rejected through ignorance and an unhelpful close-mindedness. For the average person, I think the want of knowledge about the monetary system is so tremendous that explanation is incredibly hard. In my experience, people are usually frightened and offended enough by the orthodox explanation of money creation – creation from thin air by the central bank, accessed by commercial banks (more cheaply than is available to the public) and expanded by lending. Like, “What about the gold at Fort Knox?” and “But then the bank doesn’t have my money?” The MMT discussion of net financial assets and the virtue of public deficits to facilitate private saving garners basically the same response, plus a naive policy ineffectiveness proposition springing from political demagoguery, high profile failures and long lines at the DMV.
It should be heartening! Some (most?) economic downturns need NOT be born with humble acceptance – we can do something about it. And yet, it freaks people out.
The term “out of thin air” is not accurate.
First to the “High powered money” (HPM):
Of course the balance sheet expansion of the Central Bank when injecting HPM to the banks is “out of thin air”, but the balance sheet expansion itself (creating a liability AND asset entry in the CB books) means that the CB liability (the HPM of the banks) is pledged by collateral (in case of repos) = mostly government bonds or directly represents the government bonds (in case of outright purchases of bonds = OMO).
Government bonds can serve as CB collateral because they represent the power of the government to generate demand for the “money” by enforcing taxation.
In case of the US this “money” is of course not “out of thin air” then because the US is a big military and economic power. It can always generate demand for its “money” by taxation.
Waht about the “credit money” (money created by the commercial banks when making loans to the private sector)?
Well, this “credit money” is again just a product of a balance sheet expansion of a commercial bank when making loans. And of course the liability on the books of the bank is pledged by collateral of the credit taker.
And the asset of the credit taker (the “credit money” that can circulate) is additionally pledged by the CAPITAL of the banks. So “credit money” is dually secured.
One thing here to remember is that “credit money” created through loans from commercial banks is only a CLAIM on HPM. So there is a strong connection with HPM, as “credit money” is of course legal tender and can be used for payments, but it is more like the lever of the HPM.
You see, the “out of thin air” theory is as wrong as it gets. People who use this term don’t understand how balance expansions (either by Central Banks or commercial banks) pledged by collateral work.
So what essentially happens in the “money creation process” is that collateral (which can be anything considered valueable, like real assets, intellectual property/ideas, and of course the power to tax etc.) is “liquified”/monetized. At the same time debt is created.
Because “money” is standardized it can circulate and be used for debt amortization.
This whole process course has to be secured by law and order, so in the end the government, which plays an important role in providing the general framework.
You can also see that money is not a “thing”, but more a “contract”/accounting balance.
I think one of the main reasons why people enjoy this site is because I remove a lot of the confusion from the MMT discussion and break it down in an easily understandable manner. Not that there aren’t other superb descriptions of MMT, but this is a really dense topic and can be easily bogged down resulting in paralysis analysis.
I don’t think we are bogged down. We are looking at 1933 all over again. Like those non-economists of that time (Fisher, Soddy), we are helplessly going to see a worldwide repeat of 1933-39 because of politics, pressure from bank VPs, and a total lack of logic.
@Y and @Cullen
i spoke to soon because those comments shouldn’t of been directed at MMT folks but rather the economics profession in general. as I’ve read and grasped MMT it’s become obvious that our collective language is a burden to our thinking. how have we’ve gone from something that is essentially binary into the immensely complex subject it has become? grant you, complexity is fine, but we (collectively speaking) are all still arguing about the fundamentals. how can this be when money, or should i say, government liabilities are binary. they exist or they don’t. they may exist in different forms (banknotes, deposits, or treasuries) but we can only do really do two things with them. Spend them or save them , when spending them is essentially just trading them for something in the marketplace.
The point is.. that given how much confusion has arisen in this subject it would do all us MMTers to revert to binary thinking to help bring clarity to the subject. save/spend, issuer/user, asset/liability, debt/savings. Why? Once we do, we will have dropped a ton of baggage. We don’t have to get bogged down in explaining types of currency systems, economic history, or anything. just good ol’ …MMT.
@TPC,
And while you’re at explaining things then also explain why e.g. the US can’t go broke in the future and why Argentina went broke in 2001. Because both Argentina and the US are “”issuers of their own currency”". They both can “”print”" as much money/currency/banknotes as they want.
Countries can’t go broke like a company can but they are forced to “”restructure their debt”". i.e. bondholders will “”get a haircut”‘.
Argentina pegged the Peso to the USD and had huge foreign denominated debt.
Other countries have done this with no problems. Argentina printed to many Peso to there Dollar reserve. Traders knew that and sold the phony money.
Now willy2, its your turn to say, oops, that makes sense. Thought I had a silver bullet, but no, I was wrong. Thank you for the answer.
See? That’s being a man.
Ohh God Please! Willy, Argentina issued USD debt, and pegged their currency to the dollar until they couldn’t hold it any longer. When the peso delinked, the economy crashed. The US issues debt in US dollars. Period. Read a book once in a while, will you?!
WHY IS IT SO HARD FOR PEOPLE TO UNDERSTAND, THAT WHEN (IN AN EXTREME BUT NOT TOTALLY UNREALISTIC CASE) THE FED PRINTS MORE AND MORE MONEY IN A DESPERATE ATTEMPT TO FINANCE AN UNSTUSTAINABLE DEFICIT, THE BOND MKT WILL FINALLY PROTEST AND RAISE RATES T0 5,6,9,10,20 PCT.
IF THAT WILL NOT RESULT IN A DEFACTO DEFAULT (IF NOT A LEGAL), THEN I DO NOT KNOW WHAT WILL!!!
BE SURE TO UNDERSTAND THAT THE BOND MKT IS BIGGER THAN THE POLITICIANS WILL.
@pjfny
why is so hard for you to understand that an issuers debt is simply a digital account of the currency users savings.
If you want to understand how an iPod works you don’t listen to music, you try to figure out how the data is being manipulated to produce the music. Money, for all practical purposes, is digital and requires the same approach. If you want to understand how money works you need to understand how it flows through the system on a binary level. From an operational perspective, a dollar is nothing more than an on/off switch, it either exists or it doesn’t. The whole enigma to money, and the economic system for that matter, is how money is created and destroyed by the issuer. MMT is a paradigm shift – issuer debt is savings and user debt is “debt”. One paradigm of physics does not exist in the physical world (Newtonian/Quantum) just as one paradigm of debt does not exist in the monetary world.
THE BOND MKT WILL FINALLY PROTEST AND RAISE RATES T0 5,6,9,10,20 PCT. pjfny
So what? The US Government has no need to and should not borrow money in the first place! The only reason it does so according to the MMT folks is to remove reserves from the banking system. However, the US Government has no business regulating the reserves of the banking system so even that reason for borrowing is bogus.
In other words, the “bond vigilantes” can go hang themselves for all anyone else should care.
“THE BOND MKT WILL FINALLY PROTEST AND RAISE RATES T0 5,6,9,10,20 PCT. pjfny”
So what?
When the money base starts to move in to the economy as you say its not the borrowing that will be an issue and make rates move up its inflation.
Thats the weak link in MMT. At this stage in the cycle its not an issue but rest assure that its on its on its way.
Inflation could be precluded by slapping a high reserve requirement on the banks thereby transforming those “excess reserves” to “required reserves”. Many think we should have a 100% reserve requirement anyway so any move in that direction would be welcomed.
“could be”
The money base never “moves into the economy”. Banks don’t lend reserves out to non-banks.
The amount of reserves the banks hold doesn’t play a role for credit creation. Only the price of money (FFR). There is no transmission mechanism between reserves and credit money (Money Multiplier is not correct).
If banks lend then the Fed HAS TO provide the necessary amount of reserves (to meet rr) at a given FFR if it wants to hold the overnight rates at the FFR.
If enough excess reserves exist in the first place (like atm due to QE), that’s not inflationary, too, because they aren’t “lent out”.
First,
You’ve been reading way too long to not understand that banks NEVER lend reserves. That is a myth. There is no such thing as the banks lending all those excess reserves out and causing inflation. And it’s not about the stage in the cycle. This is ALWAYS true. Banks never lend reserves and are never reserve constrained. The real problem is that households are overly debt burdened so there is low demand for credit.
I wrote “its not the borrowing that will be an issue”
I agree that those excess reserves Bank reserves are basically irrelevant and its a fact that monetary base does increases during a depression such as in the 1930′s and what recently has happened.
Its when they do finally decrease not by loans that it will be a very different day.
Long bond rates are an extension of Fed policy. There is no such thing as the bond market protesting in the USA….The Fed controls the curve.
obvously never worked in the mkts…..fed controls fed funds only…..mkt sentiment, inflationary expectations and default risk dictate the long end….unless you think the fed can buy bonds with printed money forever (QE ad infinitive)? bond mkt protesting means they ( dealears, pension funds, money managers) stop buying. cullen, might be worthwile for you to talk to people in the mkt from time to time!
“obviously never worked in the mkts”. Ha. I am a portfolio manager with a pretty stellar track record.
Please explain the 88% correlation between yields and Fed policy: http://pragcap.com/what-correlates-with-bond-yields
how can there be “88% correlation to yields”, when the yield curve consists of multiple data points. which yields? Explain to me the mechanism with which the fed controls the 30yr treasury? also, could you explain to me how the fed can be easing and the 30yr bond is selling of….how can the fed stay steady but bond prices are going up and down as the mkt moves?
Look at the correlation: http://pragcap.com/wp-content/uploads/2011/07/fredgraph.png
Although the Fed could control the long end if it wanted to it doesn’t really need to because long rates are an extension of short rates. Talk to any good bond trader and ask them what the primary mover of yields is. If they have any experience they’ll say “don’t fight the Fed”.
Oye. Stick around for a while. You have much to learn about the monetary system….Start here:
http://pragcap.com/resources/understanding-modern-monetary-system
Dear Mr. Cullen Roche,
I agree that the USA is not Greece and the USA controls its currency. Maybe some of you here forget the Fed is not like our households and we should not try to manage it like one. The states that are in trouble could go in the way of Greece as they too do not control the US Dollar. They like Greece cannot issue fiat currency.
I do have a question after reading Naked Capitalism. That is Ron Paul’s proposal to destroy the bonds the fed currently has to free up the deficit. Can this really work? Trying to wrap my head around this one.
Regarding Ron Paul, it could work, and shows how the Fed’s actions are at the pleasure of the govt, not the other way around. The interesting thing is that Paul appears to not realize that the only way to destroy those Tsy’s on the Fed’s balance sheet is to reduce the Fed’s capital by the same amount. This would leave the Fed with a negative capital position way over $1T; this isn’t a problem operationally, but it could be politically. It’s interesting because Paul was one of the loudest voices a few years back claiming that the Fed was going to be bankrupted by all the loans and MBS it was holding went bad. That’s why he wanted the Fed to be audited. Seems to me he’s trying to have it both ways.
A much simpler solution would be to simply exempt the Tsy’s the Fed is holding from the debt ceiling.
“A much simpler solution would be to simply exempt the Tsy’s the Fed is holding from the debt ceiling.”
Could that be done through an executive order?!
Can’t be done by executive order or it probably would have been done already, assuming Obama’s team can do basic reserve accounting (then again, maybe not).
I posted this under “THE FINAL VERDICT ON QE2? [28 Jun 2011 by Cullen Roche| 34 Comments | ]” (mine was th 34th):
OK TPC, I think we’ve finally had the last post on QE2. You said at the start that QE2 was a downsteam program of the FED that would do nothing except create expectations of one sort or another. OK. That happened.
The more important issue is what happend as a result of Uncle Sam’s substaintial deficit spending over the last few years. Anyone that could add numbers knew that this was going to burst through the “Debt Ceiling”. (Another useless number used by banks to torture the public.)
Since the FED took in a good chunk of the so called “Debt” under QE1 and QE2 why can’t Uncle Sam’s debt be recalutated to a lower number and we can get out of the political mess? I understand how the Debt is calulated, it’s explained at http://en.wikipedia.org/wiki/United_States_public_debt
I understand “raising the debit ceiling” also requires a change in the “law” on debit ceilings. Which is easier to change?
I’ll admit up front I haven’t read the article, but if Ron Paul is suggesting we “destroy” the debt held by the FED to get around the debt ceiling then sure it’ll work. The debt ceiling is only a POLITCAL obstacle it has no operation basis for existing.
And any “debt” held by the FED has already been swapped for reserves so its not like it would really be destroying anything.
right. the only thing destroyed would be the Fed’s capital, which is meaningless operationally since the Fed is the monopoly supplier of reserve balances.
Sure, but the US states already have the bailout mechanism in place. The US federal govt allocates money to states every year…..
testing – my last post didn’t go thru for some reason
Thanks for the responses this site is very informative and refreshing. Most sites these days you ask a question about something financial and get flamed or called a troll if you do nto agree with their view.
Moving along with these bonds. Wouldn’t this be like a write off as the fed tried to sell these toxic bonds and no one wanted them? Do they really have any wealth, as the fed could destroy them and then create more bonds or currency? If the bonds are held outside the system is that any different then destroying them? It sounds like it would have the same effect.
Being in business it sounds like sooner of later they will have to be written off or destroyed in this instance to help clear the books. They tried to sell some of these toxic bonds the last POMO and it did not go well, so the fed is no longer going to offer them at this time. I really do not know much about USA bonds. I do have some municie’s with cities and states in the black still. I did to dump some from cities and states in the red, when congress was looking for a mechanism for states to go bankrupt.
Ron Paul is having some fun with the fiat money illusion and sacred cows. How about “destroying” the most sacred of cows, the Social Security “Trust Fund”? Or any of the other intragovernmental and intra-agency “debts” on the books of the federal government? Oh, the horror! I can just hear Paul Krugman and AARP raging against the very idea that the sacred “Trust Fund” is not an actual debt.
The debt ceiling crisis is artificial, but the Obama administration will use it to “shut down” the government and scare the ignorant multitude if the Republicans are silly enough to give him the chance, although what actually gets “shut down” are certain nonessential government functions. For a real US default, look at the closing of the gold window by Richard Nixon 40 years ago. Did the world end? No.
Is Obama worried about the War Powers Act and his adventure in Libya? No; Obama has taken a step Bush never took and has ignored the War Powers Act. He hasn’t been impeached or indicted, and by the way what exactly is the legal penalty for ignoring the War Powers Act? There doesn’t seem to be one. If Obama wanted to get around the debt ceiling law, he would figure out a way in 30 minutes or less. He doesn’t want to get around it because he sees political gain in the situation, as do the Republicans (for now). In this environment cynicism rules all.
I am pretty sure Krugman understands that intra-government debt is not a debt at all. Never saw him indicate anything to the contrary. Krugman is actually getting closer and closer to MMT these days. HE’s is using a lot of the same language.
He’ll never fully accept it in my opinion. It would contradict too much of his prior work. He’s dug himself in too deep in neoclassic doodoo to crawl out….
Keep in mind that Zimbabwe is also a “currency issuer.” When those buying your bonds (China and others) lose faith in the stability of your currency, all of the “printing money” you do causes hyperinflation.
Zakaria is pretty much always wrong. I’ll take his job and do twice as well for half the salary.