Ecomonics, Politics and Modern Deomcracy

Money as the root of all evil?

In this discussion, I take the stance that money is simply a tool for operating our financial system, and is really nothing more than enabling banks, consumers and financial analysts a convenient way of discussing and operating on wealth transfer. The fact that income inequality operates at such an insidious level within our society and causes much suffering is an attribute of the system that is not inherent to the theory of how money operates as a place marker for claims on wealth. To the left is Vermeer’s famous depiction of a woman holding a balance. The Dutch master was very concerned with painting masterworks that were graphically balanced. Our social discourse is very much in need of more discussions about restoring balance and justice. Whether this goal can be pulled up out of a wrecked society remains to be seen.

Wynne Godley on the purpose of a federal government

Godley wrote the following excerpt in 1992 as Europe’s leaders debated the worthiness of the formation of the European Union. Godley was truly a prophet for outlining Greece’s situation in such succinct form almost twenty years before its economy began to unravel. Godley’s writings have become the backbone to Modern Money Theory-you remember, those are folks who say the federal government can create as much debt as needed to put us all on easy street. What follows is an analysis of the European Situation as the Euro Zone was about to be established. Godley is pointing out that without a Federal Government to back it up, the creation of the Euro Zone was to place those nations who participated into a zombie like state of affairs; they would give up their own sovereign currencies that would then be replaced by the Euro. That the Euro was not really a currency backed up by a sovereign government did not seem to strike anyone as odd or an excercise in futility. Modern Money Theory will tell us that without the backing of a sovereign government (written constitutions that name the sovereign, clearly establish its authority as resting on the constituent society and culture are a minimul feature here) to enforce a legal monopoly, anything denoted as money is really not what it is being called; the Euro Zone is just that-a trading zone or conglomeration of trading agreements. The current mess in Europe bears out the worthiness of Godley’s critique as no one governing entity has the authority to act as sovereign for the collection of republics involved. Actually, Modern Money Theory is put in a better light at the bottom of this page. As the theory ties into ideas on political theory, it offers some hope for the future. Our real problems as a culture lie in discovering more efficient methods of distribution of goods and services and not in shortages of materials or resources. A better understanding of how money works will facilitate both the better workings of our social insitutions and work towards resolving much personal suffering resulting in more overall individual satisfaction and happiness.

I think that the central government of any sovereign state ought to be striving all the time to determine the optimum overall level of public provision, the correct overall burden of taxation, the correct allocation of total expenditures between competing requirements and the just distribution of the tax burden. It must also determine the extent to which any gap between expenditure and taxation is financed by making a draft on the central bank and how much it is financed by borrowing and on what terms. The way in which governments decide all these (and some other) issues, and the quality of leadership which they can deploy, will, in interaction with the decisions of individuals, corporations and foreigners, determine such things as interest rates, the exchange rate, the inflation rate, the growth rate and the unemployment rate. It will also profoundly influence the distribution of income and wealth not only between individuals but between whole regions, assisting, one hopes, those adversely affected by structural change.

What happens if a whole country – a potential ‘region’ in a fully integrated community – suffers a structural setback? So long as it is a sovereign state, it can devalue its currency. It can then trade successfully at full employment provided its people accept the necessary cut in their real incomes. With an economic and monetary union, this recourse is obviously barred, and its prospect is grave indeed unless federal budgeting arrangements are made which fulfil a redistributive role. As was clearly recognized in the MacDougall Report which was published in 1977, there has to be a quid pro quo for giving up the devaluation option in the form of fiscal redistribution. Some writers (such as Samuel Brittan and Sir Douglas Hague) have seriously suggested that EMU, by abolishing the balance of payments problem in its present form, would indeed abolish the problem, where it exists, of persistent failure to compete successfully in world markets. But as Professor Martin Feldstein pointed out in a major article in the Economist (13 June), this argument is very dangerously mistaken. If a country or region has no power to devalue, and if it is not the beneficiary of a system of fiscal equalisation, then there is nothing to stop it suffering a process of cumulative and terminal decline leading, in the end, to emigration as the only alternative to poverty or starvation.

 Ecology: Balances for Life are destroyed

Amphibians facing “terrifying” rate of extinction

Researchers say tropical regions of richest diversity are most at risk of losing frogs, toads, newts and salamanders

A yellow frog (Hyla punctata)

If the current rapid extermination of animals, plants and other species really is the "sixth mass extinction", then it is the amphibian branch of the tree of life that is undergoing the most drastic pruning. In research described as "terrifying" by an independent expert, scientists predict the future for frogs, toads, newts and salamanders is even more bleak than conservationists had realized. Around half of amphibian species are in decline, while a third are already threatened with extinction. But scientists now predict that areas with the highest diversity of amphibian species will be under the most intense threat in the future.

Modern Money Theory

Modern Money theory (MMT) has quite a wide following these days and is being widely critiqued. I find the first step needed or really to borrow a concept from physics, the zeroth state of mind, is to try to wrap your thoughts around the concept of money and what it really is. Look at the behavior of folks who have twenty or thirty times the cost of one year's living stashed in away in wealth-bank accounts, real estate. Their attitude about money probably has changed imepercetably as the amount of personal wealth increased-this assumes it was a matter of arriving at a final state of great wealth after a struggle and not being given the whole sum at once . The very poor and the very rich may display similar and somewhat cavalier attitudes as to not really give two hoots about it. Afterall, the paper itself is worthless, or nearly so, and in a fiat money system, that is what the government desires and indeed MMT is ok with that as well. The bottom line on money is that the stuff it can get for us is what matters, not the number of digits to the left of the decimal point in the bank account. I may have enough digits to the left of the decimal to place demands on thirty years worth of housing, clothes, food, transportation, vacations, redecorating, mink coats, Maseratis, condos . . . so I feel really well off. Or I may have only one digit to the left of the decimal at the end of the month so I don't feel so well off because I can't even buy another month's worth of life supporting rent, food, transportation and the mink coat or Maserati is a pipe dream. To put it more succinctly money is the placeholder, in the bank, of any individuals’ claim on goods and services.

To summarize, before moving to the next state of mind in understanding money we need to let go of the idea that fiat money is a ‘bad’ or ‘worthless’ system because the currency is not valuable in and of itself-it is not made of precious metal and cannot be redeemed for precious metal. In fact, to the government’s central bank, fiat money is something it creates by moving the deicmal point in member banks-like your local savings and loan. In expection of increased demand for the folding green, the Treasury prints more placeholders (singles, tens, twenties, fifites) and prepares to ship them out to branch banks of the Federal Reserve, as retail banks call for more cash-which they need suprisingly little of to meet demand. Let the Federal Reserve explain how it works.

As of December 2007, currency in circulation—thatis, U.S. coins and paper currency in the hands of the public—totaled about $829 billion dollars. The amount of cash in circulation has risen rapidly in recent decades and much of the increase has been caused by demand from abroad. The Federal Reserve estimates that the majority of the cash in circulation today is outside the United States.
Meeting the Variable Demand for Cash
The public typically obtains its cash from banks by withdrawing cash from automated teller machines (ATMs) or by cashing checks. The amount of cash that the public holds varies seasonally, by the day of the month, and even by the day of the week. For example, people demand a large amount of cash for shopping and vacations during the year-end holiday season. Also, people typically withdraw cash at ATMs over the weekend, so there is more cash in circulation on Monday than on Friday.
To meet the demands of their customers, banks get cash from Federal Reserve Banks. Most medium- and large-sized banks maintain reserve accounts at one of the 12 regional Federal Reserve Banks, and they pay for the cash they get from the Fed by having those accounts debited. Some smaller banks maintain their required reserves at larger, "correspondent," banks. The smaller banks get cash through the correspondent banks, which charge a fee for the service. The larger banks get currency from the Fed and pass it on to the smaller banks.

To take stock of where the conversation on MMT is at:
Money is a placeholder or marker or number on a scoreboard so our financial system may be used efficiently by banks and others in the position of lending money, to keep track of claims on wealth-that is goods and services.
To move forward we need to grasp the idea that money is created by the Federal Reserve and Treasury together moving digits around on computer screens. That is all. Again, keystrokes at the Fed bring money up to be spent. When the money is actually spent (via government contracts or dispersals by direct outlays (grants, welfare payments)) then the money emerges into the system as the recipient of a government check cashes it in at her bank.

Finally, to lay to rest now, once and for al,l the myth of government debts, which is receiving much ballyhoo in the press:
Since the government has a monopoly on the creation of its own debt vis á vis its connection to the banking system it really can’t go and default on its own creation. Money, by any other name is an IOU of the the government to itself-how is it going to default on that? If more money is needed to pay a claimant ($6 trillion to the defense contractor please), someone pushes some keystrokes and a check spins off the printer to the contractor or the contractor has a credit balance on their bank account. And remember, and this is key: the current mess we are in was created by the private financial sector who brought claims on wealth into being without following the money trail in a responsible way. Just think about the NINJA (no income, job, assets) loans that were made and then sold six times over to create leverage that was then stamped with the Good Housekeeping seal at AAA. That has nothing to do with the system we are examining except that—the Federal Reserve became the purchaser of the whole mess in the last resort. Let us move along.
From another source, who has explained it much better than I can, we may gain an understanding of how this money thing works.

 It might help to think of the US government as an alchemist. The alchemist can create as much gold as she pleases (from nothing) in order to buy up productivity and satisfy the growing monetary demands of the people she supplies currency to, but she has to be very careful not to debase her gold (you’ll notice that our trusty alchemist is female in this example as males have proven throughout history that they are not trustworthy overseers of government money). Most importantly, there is no solvency risk for the alchemist – only a pseudo form of default via currency collapse (hyperinflation). The alchemist only debases her gold when she issues an amount of gold that is in excess of productive capacity (inflation). But most importantly, she can never “run out” of gold. Therefore, she is never constrained in her ability to spend as a household, business or US state is. And more importantly, there is no solvency constraint on the state in the traditional manner that we think of for a household or business. That is, there is no such thing as the state becoming insolvent or not being able to meet its obligations – all of which are denominated in a currency that it alone can create.
In addition, we must understand that banks merely leverage government money. When we go through business school we are taught that banks obtain deposits and then leverage those deposits up by 10X or so. This is why we call the modern banking system a “Fractional Reserve Banking” system. Banks supposedly lend a portion of their “reserves”. There’s just one problem here. Banks are never reserve constrained! Banks are always capital constrained. Reserves are used for only two purposes – to settle payments in the overnight market and to meet the Fed’s reserve ratios. Aside from this, reserves have very little impact on the day to day lending operations of banks in the USA. This was recently confirmed in a Fed paper:

“Changes in reserves are unrelated to changes in lending, and open market operations do not have a direct impact on lending. We conclude that the textbook treatment of money in the transmission mechanism can be rejected.”
This is very important to understand because many have assumed that various Fed policies in recent years would be inflationary or even hyperinflationary. But all the Fed has been doing is adding reserves to the banking system. As we learned above, this doesn’t lead to more lending and will not result in the private sector being able to access more capital. Because banks are not reserve constrained it can only mean one thing – banks lend when creditworthy customers have demand for loans.

Warren Mosler, writer at Huffington Post, is a long time student of Modern Money Theory: the last paragraph needs to be on a card carried around in your purse or backpack or wallet and pulled out at odd moments to be reflected upon.

The headline progressives are in full retreat. They have found out the hard way that their bleeding heart pleadings -- 'yes, the financial markets might destroy us, but how can we cut this or that worthy cause' -- don't cut it. They have fallen into the out of paradigm world that takes it as gospel that the U.S. is at imminent risk of becoming the next Greece; where financial markets can cut off funding and ability to spend and force the giving up of national sovereignty and begging for an IMF bailout, or else, face the option of default or printing money, which launches one down that slippery slope to hyperinflation... bla bla bla...
      And so to show they too are indeed fiscally responsible grownups who wouldn't think of instigating such a financial crisis, the headline progressives more than agree that the federal deficit is indeed a very dangerous long term menace that demands appropriate attention. Accordingly, President Obama, on behalf of the Democrats, has proposed over $4 trillion of his version of deficit reduction over the next ten years, with "everything on the table" including Social Security and Medicare. The main difference seems to be that the Democrats include tax hikes, while the Republicans only support spending cuts.
      The great irony is that with productivity at an all-time high, and with no actual shortage of the real resources needed to take care of our seniors at a level that makes us feel proud to be Americans, to care for the sick, to educate our children, and to provide for the public infrastructure and institutional structure that facilitates and fosters private sector output and employment, there has never been a better time for the progressive agenda. The few lonely progressives, who do understand all this and have stayed the course with the progressive agenda, are those who recognize what has come to be known as Modern Monetary Theory (MMT). It is these MMT progressives who realize that a currency like the U.S. dollar is a simple public monopoly, and that the following are facts of actual monetary operations:
Federal taxes serve to regulate aggregate demand, not to raise revenue per se.
Federal borrowing serves to regulate the term structure of interest rates, and not to fund expenditures.
      In other words MMT teaches us there is no such thing as the U.S. Government running out of dollars, that the U.S. Government is not dependent on foreign borrowing to be able to spend, and that hyperinflation comes only from sustained over spending far beyond full employment and our capacity to produce. Nor can the U.S. government become the next Greece or Ireland. MMT teaches that financially, joining the euro zone put those nations into the positions of U.S. states. So while California or Illinois can become the next Greece or Ireland, and need a federal bailout to avoid default, just like Greece and Ireland needed a bailout from the European Central Bank, the widely proclaimed analogy of Greece and the U.S. Government is entirely false, and tragically counterproductive.
      And as for the U.S. national debt and all the talk about borrowing from China, MMT recognizes that U.S. Treasury securities are, functionally, nothing more than savings accounts at the Fed, which the Fed in fact happens to call securities accounts. Yes, the trillions of dollars of U.S. national debt is nothing more than that many dollars in savings accounts at the Fed. So when China buys Treasury securities, which we call going into debt to China, all that happens is the dollars they got from selling things to us that went into their checking account at the Fed, get shifted to their savings account at the Fed. And when we pay back China, which happens every month as some of their Treasury securities come due, all the happens is the Fed shifts those dollars (plus interest) from China's savings account back to China's checking account, all on the Fed's books. (note: there are no grandchildren involved in this process!)
      Confronted with MMT, all mainstream financial arguments for defunding and 'strengthening' Social Security and Medicare utterly fail. All mainstream financial arguments for defunding education utterly fail. All mainstream financial arguments against maintaining desired public infrastructure utterly fail. And unemployment, for all practical purposes can be eliminated in short order.
      For an example of an MMT supported progressive policy initiative, many MMT progressives today favor the immediate suspension of all FICA taxes, which are highly regressive, punishing taxes on people working for a living that no progressive should tolerate. Eliminating FICA fixes the economy the progressive way, from the bottom up versus the highly regressive top down trickle-down economics practiced by the current administration that would have made even President Reagan blush. Yes, the last two years have seen positive real growth, but with employment remaining near post depression lows, and wages under continuous downward pressure, executive compensation just hit new highs and stocks more than doubled, as this administration presided over the largest transfer of wealth from the least to the most wealthy in the history of the world. Many headline progressives, however, are violently opposed to cutting FICA taxes, fearing such cuts would be considered a defunding of Social Security. And without an understanding of MMT, they are not equipped to successfully defend the combination of FICA cuts AND true Social Security and Medicare strengthening (increased benefits) supported by MMT equipped progressives.
      With no actual shortages of food, clothing, and housing for our seniors, no disagreement that they are not being over provisioned by Social Security payments, and a severe shortage of aggregate demand in the U.S. economy in general, MMT progressives categorically reject the notion of any kind of reduction in Social Security or Medicare benefits or eligibility, and support both increased benefits and FICA cuts.

The knowledge that the only constraints on our prosperity are the limits of our productive capacity and available resources, which include everyone who is willing and able to work, sets MMT progressives far apart from today's headline and out of paradigm progressives (and conservatives) who are handicapped by the false notion that deficits per se are a problem, as they support deficit reduction even in the context of today's massive shortfall of aggregate demand. MMT progressives know the US can afford to defend itself, ensure taxes are low enough relative to spending to allow the private sector to employ anyone willing and able to work who doesn't already have a good job, allow government to provide, maintain, and fund the public infrastructure we deem appropriate, including the military, legal system, Social Security system, transportation, healthcare, and research and education, including the funding of private sector contractors for public purpose as deemed appropriate.

Finally, the master himself, Wynne Godley, explained in 2006 that if American consumers ever turned away from his and her massive spending spree and decided to attempt to save instead, the U. S Economy would fly into a massive tailspin and fly straight down into the ground. He also explains the role that the massive foreign import industry (aka WalMart, Target, KMart, Sears) played in allowing Americans to spend well above the domestic level of productivity. Succinctly, our economy had more claims on wealth, in the form of indebtedness, than the amount of actual wealth in existence. Despite massive attempts to save, too much private debt (not fiscal debt) is really the root cause of our economic ills. Not too good. At all. In fact it is what keeps us our financial system in its current Zombie state of existence. Of course if the net savings eventually increases to a critical level perhaps it will be a good thing so consumers will feel confident enought to start spending again.

Ok, here’s the best written primer on MMT-remember to give up on any and all notions you may have had about, money, governement debt and our banking system, they are most likely wrong unless you were already well versed in MMT.

Guess I’ll get ready to hit the road again.

	Big Portage Lake, Munith, Michigan-click to enlarge