What is “MMT”?

In some of my posts on Facebook, Progressive Policy Digest, The Soap Blog, or in my emails I have referred to "MMT". I usually get no questions or inquiries about it, which seems to reflect a lack of knowledge of the subject. Basically, MMT prescribes a path that would have had us at full employment long ago, and from a federal debt perspective, is the exact opposite of the austerity currently being pushed by both political parties, so it's very important. In spite of it's name, it's not modern, not exclusively monetary, and certainly not theory. It's an explanation of how economics and banking works in a country with it's own currency. It's understood by all good economists at the Fed and think tanks around the country that are not wedded to an ideological agenda. But, it can't seem to penetrate the Washington Consensus, the mainstream media, or the lay public, who continue to think the federal government must operate like an individual or a state that only uses the currency, which is the exact opposite of the way it works.

The macroeconomic literature provides the evidence for the validity of MMT, but is beyond the understanding of lay people. "What is Modern Monetary Theory, or “MMT”? by Dale Pierce is a lay explanation by a non-economist of the basics of MMT. For background and an historical perspective explore the three part series on MMT at New Economic Perspectives by the same author.

Here’s where I stand. Where are you?

Have you noticed that the MMTers (Mosler, Wray, Kelton, etal) are getting more exposure in interviews on the internet and some main stream media? By the time the next election rolls around the jig will be up for the austerity dummies. I've digested all the MMT (Modern Money Theory) stuff and am convinced that most of the other economists are in a time warp, or just being outright political to maintain their research funding. It's so simple, we just need the government to get a jobs program enacted and start spending again on infrastructure, education, and research like we did in the fifties. 

In the long run we should have government health insurance, public financing of infrastructure, education and basic research, and publicly funded retirement programs for all, so people don't have to worry about these things and can spend their income to maintain demand and enjoy life. That is a legitimate role for government as demonstrated by most enlightened developed countries around the world. We need to catch up.

We also need to harness the corporations and the few that own and run them, so they can do what they do well, and not run the country into the ground to satisfy their own greed. But, it's very hard to do when all the politicians and the electorate are acting like we're still on the gold standard. Guys like Pete Peterson, Simpson, and Bowles are engaging in false advertising. They're totally in the pockets of the oligarchy.

Beyond that we need to stop the warring, snooping, and international belligerence and join the community of nations instead of trying to sanction or rule them, while agitating for another cold war. And, that includes dissolving the dependent relationships with the Saudis and Israelis and their lobbyists in Washington.

It will be up to the Democrats to do all this, because the Republicans are at present a hopeless cause. They are trapped in the Ayn Rand propaganda. Democrats will have to start discovering what is important and what is not and re-prioritize their objectives and actions. Rehashing Republican ills is just free advertising for Fox News. Keeping issues in the limelight is what gets the public started thinking about them. And, in my opinion, the important issues are the ones I've just enumerated. The Dems won't be successful until they ditch the alliance with Wall Street and corporate America. We already have one party that is totally dedicated to that bunch. We don't need two. We need one party that is smart and is the champion of the people, so the people have a voice in what legislation gets enacted. It may take a couple election cycles to accomplish it, buts it has to be done to get the country back on the right track.

The one thing individuals you can do is keep these talking points alive in the circles they travel in, and vote for what is right, not what is expedient or compromising to win elections. That will only maintain the status quo.

And, this is not being negative! It's positive. Being negative is going along to get along, while half the country suffers in poverty or near poverty.

Do your part and tell your family and friends to do the same!

Reconciling MMT and the Current Legal Finance System

Modern Money Theory (MMT) explains the way finance works in a country with its own currency, when many self imposed legal constraints are removed. Currently existing legal constraints in the United States include the following:

1) a national debt limit

2) the Treasury can only mint coin

3) the Federal Reserve bank (Fed) can issue paper money and credit Treasury and private reserve accounts in payment for notes, bills and other Treasury and privately issued financial assets it buys in the open market. The Fed cannot buy Treasury securities directly from the Treasury.

3) the income earned on assets the Fed purchases is paid to the Treasury

4) the members of the Fed Board of Governors are appointed by the President and approved by the Senate.

In these legal constraints we see and attempt to make the Treasury and Fed somewhat independent, but also subject to government action in the final analysis. This is probably due to the time period when these laws were enacted, when the country was on the gold standard. We are no longer on the gold standard now,  so some no longer apply, as we are now a country with a fiat currency. If held strictly to the current legal constraints, the country is treated like an individual or state which must use tax collections or borrow in it’s own currency to finance its operations.

The contention between MMT advocates and its critics largely revolves around the independence of the Fed from the Treasury. In practice, over the years the Fed and Treasury have acted jointly on the vast majority of matters, for example, in Fed provided loans to bring reserve accounts up to the required level and in purchasing Treasury notes and bills from member banks to lower the interest rate the Treasury needs to pay on them. MMT economists tend to treat the Treasury and Fed as a consolidated unit. Critics sometimes do not. Both have a point and the difference is not likely to be resolved any time soon.

The downside of the current stalemate serves to reinforce the commonly held premise that the federal government needs to be treated like and individual or state that is a user of the currency and not like the issuer to the currency that it is, which leads to policies that are the exact opposite of what is needed when the country is in a recession or near depression and unemployment is high. The current emphasis on cutting spending and limiting debt, when fiscal stimulus or reduced taxes are needed to increase demand is an example of this case. When the country is prospering and at full employment taxes need to be increased or federal debt repaid to avoid inflation. These necessities, and the need for changes in the law to accommodate them, are obscured by the lack of understanding of the underlying principles that MMT  seeks to reveal .

Government has a Role in the Economy–Get Over It!

The mindset of the right is wrong. The federal government is not like an individual or a state. It is the issuer of the currency. Individuals and states are just users. They must borrow to spend beyond their means. The government doesn’t. When the private sector saves, but the savings are not invested, the government must run deficits to provide the vehicle to absorb the savings, i. e. government bills and bonds. It’s a mathematical identity that many economists, politicians, and think tanks don’t understand.

The public must understand that the federal government has a major role to play in providing infrastructure, in the form of roads, bridges, power grids, research, education,  health insurance, retirement benefits, and a living wage job guarantee to eliminate unemployment.  Worker skills and attitudes deteriorate when workers are unemployed. When the individuals and private businesses have to provide for these benefits through savings, it reduces spending, which sustains demand and maintains a healthy economy.

To harness the capitalistic drive for innovation, entrepreneurship, and monetary success reasonable government regulations are required to prevent an unequal distribution of the rewards of productivity growth, maintain a healthy middle class, and keep people from falling into poverty and becoming a drag on the economy.

If we continue to think that capitalism is a self regulating wonder and people are self sustaining individuals that don’t need to cooperate in their endeavors we will continue to be a society struggling for answers and living with cycles of economic bubbles that destroy the spirit and will of the country.

Restoring the 1950s Economy as a Solution to the Financial Crisis

The economy needs demand and investment to produce goods and services. Demand and investment come from the same source, income. If more income is saved, there is less available to create demand and vice versa.

At this time savings need to be reduced to increase demand. The usual means to do this would be to lower interest rates. But rates are already near zero, and this hasn't caused savers to start spending. So what is the mechanism to do this? Tax the savers, and reduce the taxes on spenders, to zero if necessary. If need be, let the government issue the funds to provide the infrastructure, free health care, education, and retirement benefits to the spenders, so more of their income can go to spending.

This is essentially what was done in the decades immediately after WWII, when the highest marginal tax rates were near 100% and the government was spending on roads, education, the GI Bill, and Social Security and Medicare had been implemented.

Instead, what we have done since the 1980's is reduce the highest marginal tax rates and taxes on capital gains, allow offshore tax havens, privatize education, let our infrastructure deteriorate, bust unions, and deregulate business to allow almost all of the rewards of productivity to go to savers. And, now the austerity advocates are on a path to destroy Social Security and Medicare.

Isn't it clear that we have to restore the balance between spending and saving that existed the fifties and sixties?

Simplifying Econospeak

The following paragraph is an example of how to talk to the average voter about how the economy works, could work, or should work without resorting to economic jargon.

“The federal government is the people's agent, and they have authorized it to issue money so they can have a convenient way to buy things and pay their taxes. Taxes can be viewed as reimbursement for infrastructure, education, research, and defense projects the government has undertaken on behalf of the people. If the economy is so weak that people cannot find employment or resources are being underutilized, the government can either lower taxes or issue more money. If the economy is so strong that production of goods and services cannot meet demand, the government can increase taxes or stop issuing money. That's how the economy can be stabilized.”

Implicit in the above description of the economy, but not required to get the point across, is the fact that government is the sole issuer of money, taxes are not collected and then used, but instead the government can issue money to pay for what has been legislated to be done and then collect taxes after the fact to reflect what goods and services the people have received. In times of a weak economy the government can reduce taxes and defer reimbursement for services rendered, or in times of an overheating economy, the government can accumulate taxes it will need for future projects to take some steam out of the economy.

The federal government is not like an individual, a company, or a state. The federal government is the exclusive issuer of money. Any other entity is only a user of the money. To get money they have to engage in economic transactions, or borrow the money from an entity that has money to lend or grant. If they borrow, it results in debts that must be paid off later.

Any money the government issues increases the money available to the private sector to save or spend. If the private sector elects to spend, it will increase demand for goods and services, which could exceed the economic resources of the country. This will result in a rise in the prices of assets, consumer goods, or labor. At this point the government must increase taxes or stop issuing money to bring demand back into line with supply.

The fact that federal deficits and debt are not mentioned reflects their lack of importance in the scheme of things. The "national debt" is not a debt owed to anyone. It can be viewed as the net amount of money the government has issued over time. It may fluctuate up and down, but it is not something that needs to be paid off or compared to GDP. To think of it that way is to think that football teams need to pay back the scores they have run up in a game.

Over time, the population increases and the economy grows. This requires more money in circulation so it is up to the government to provide it. If it doesn’t, the economy will stagnate.

To the extent that the government issues money to further foreign interests or which results in foreign claims, the amount of money issued in that way could arguably become an important issue.

The average voter doesn't want to hear about economic theories or jargon that only an economist or economic analyst would understand. They just want to know how the economy is supposed to work. If economic concepts are explained in a simple, but factual way, people will start to accept them and turn away from the propaganda and misinformation that currently pervades the national economic conversation, much of which is only applicable to countries that don’t have their own money, or whose money is backed by a commodity like gold or silver.

Occupy Should Work Within the Democratic Party

Trying to work around the two major parties in the US is a fools errand. The grassroots effort of Occupy should be directed at informing workers where their interests lie and organizing them to change the government.

The Democrats under FDR used to represent middle and lower class workers. Since the advent of the DLC and the Clinton administration, the Democrats have moved into Republican territory by accepting Wall Street influence. That is not their natural constituency. They have been able to do it only with the help of the main stream media, which is driven by money. The great mass of the electorate resides in the middle and lower classes. Now they rely mainly on the main stream media for their information, which is selling them a bill of goods on behalf of the 1% and the Washington consensus. To organize them around their real interests requires a door to door and internet media campaign to take over the Democratic Party and move it back to where it was under FDR.

The Republican Party is in disarray, and there is already a strong progressive element in the Democratic Party that is for reducing inequality, single payer health care, minority rights, environmental protection, a safety net, and a place for government in the economic landscape. People like Bernie Sanders and Elizabeth Warren are examples of the type of people that can be elected to national office. People like them can be recruited to local and state offices. The only problem now is voter reliance on the mainstream media and the political advertising propaganda it presents. A sustained grass roots effort on a personal level can turn that around. It's just a matter of personal contact to educate workers where there interests lie. This is the only way to overpower money in politics.

The demonstrations in the seventies around civil rights and the Vietnam war were ruthlessly handled by police and the military, which do what the government tells them to do. The same happened to the current Occupy movements in New York and elsewhere. The only way to give the middle and lower class workers a voice is to inform them of their real interests and organize them to change the government.

What if all the money disappeared tomorrow?

Consider the case where everyone woke up tomorrow and all money in all forms, coin, currency, bank account balances,  etc had disappeared? No one would be able to buy food, farmers would not be able to grow food since they wouldn’t have the money to buy seed or fuel for their tractors. All production would stop because no one would have money to buy the goods produced or to pay for the raw materials and labor that went into the goods. It would be a matter of once again living off what nature provides, bartering with the goods available, or introducing some form of money as a way to hasten the recovery.

Clearly, reintroducing money would be a faster means of recovery than the other two. It would boil down to everyone starting to print their own money (IOUs) or the government printing coin or the Fed printing currency to prime the pump and get economy back on track. Most people would feel safer taking government money they had always used rather than personal IOUs in exchange for purchases.

To get the money into circulation the Fed could simply restore the balances everyone had in their accounts at their banks or the Fed the day before the money disappeared.

Since the Fed printed the money, what form of debt did it incur doing so? None. The balances held in treasury notes and bills at the Fed could simply be replaced with reserve account balances of the same amount. So the national debt would disappear unless the government decided to accept reserves for government issued notes and bills again.

So what is this national debt we keep talking about? What’s to keep the Fed from printing all the money it needs to buy up the national debt? All the interest accrued on the government debt the Fed holds is remitted back to the government treasury anyway.

The national debt is nothing more than the government providing a secure way for the private sector to save and for foreign governments to supply goods to Americans. Foreign businesses selling those goods to Americans convert the dollars they get for the goods into the local currency to pay for the labor and materials that went into them. The dollars the foreign government receives from the suppliers in exchange for the local currency it provides ends up in it’s reserve account at the Fed. They usually buy treasury notes and bills since they pay interest.

The only way for foreign governments to cash in their dollars held at the Fed is for them to buy American goods or assets, and we can decide if we want to sell those goods and assets to them depending on what we want our balance of payments and exchange rate to be.

At this point in time the only threat from the national debt seems to be that it can be used by a minority of Americans to blackmail the majority into accepting their ideology as the governing mandate.

Why should we pay interest on the national debt?

Why should the government pay interest on the national debt? People hold it because it's better than holding other assets. China holds it to finance their trade surplus. It's our money. We can print whatever we need to sustain full employment if we spend it wisely on the infrastructure, education, and research we need to sustain the economy and don't create more demand than we can support with the population and resources we have at our disposal. Doing the latter would cause inflation, so that's really the only limit there is on printing money. The debt ceiling is just a self imposed constraint that is used to deflate the economy and cause political instability. The easiest way to reduce the debt is to stop paying interest on it, and just print whatever money is necessary to sustain the economy, without overheating it. Think about it. Read about it. It's not a new idea.

Why Inequality is Increasing

As long as half the population sees some gain in wealth, they vote to enable the rich to impoverish the poor. This explains the current politics of the country. In the chart below the problem lies in in center of the distribution where the gains in wealth are small. These people identify with the people at the very top and are more concerned about handouts to the poor than handouts to the wealthy and corporations in the form of tax breaks and loopholes, so they vote to dismantle unions and squeeze the working people that are losing wealth. As long as the wealthy elite that run the country can continue to throw this middle group a bone to keep them voting in the interest of the wealthy, inequality will continue to increase.

Right Wingers Still Run the Country.

 

It's a Right vs. Left divide, not Dems vs. GOP.  Many Democrats represent  conservative, not progressive districts. If 15 Dems in the Senate would vote their party platform, gun control would pass.

If so many Dems weren't conservative, the Iraq war approval wouldn't have passed, Guantanamo would be closed, Wall Street crooks would be in jail, Bibi Netanyahu wouldn't get 22 congressional standing ovations, the war on terror and drone attacks would be winding down, civil liberties would not be threatened, austerity wouldn't be on the table, etc. etc. No wonder the GOP wants to vote by district instead of state. It's why the GOP has moved even farther to the right and the Dems have moved across the center line.

The GOP has Fox News promoting their ideology. The Dems have MSNBC, but MSNBC represents the conservative wing of the Democratic party. There's nothing on there that's progressive. They love the new Obama sellout on Social Security. They still think austerity is wonderful. Who in the main stream media speaks for progressives? Only the polls indicative some progressive sentiment.

So, what does it look like for 2016? Another Clinton that voted for Iraq, loves sanctions and hegemony, loves Bibi, hates Iran, likes Wall Street and globalization. Hardly a progressive.  Even Ron Paul is further left than the Democratic Party on foreign policy and military entanglements. It looks like more of the same for a long while.

Read this link and see the evidence that right wingers still run the country.

The Democratic Party Transformation

People know the GOP has gone hard right in pursuit of its ideology. The Democrats used to have an ideology, instilled by FDR and the Great Depression, which embodied keeping capitalism regulated, limiting the power of elite financial interests, preventing extreme inequality of wealth and income, using government to do what it must do to promote the general welfare and secure a stable society, promoting a strong middle class, and providing a safety net for people struggling to maintain a decent living, including retired and disabled people on limited incomes.

The Clinton administration and the Democratic Leadership Council changed all that. They compromised with Republicans in dismantling welfare programs, promoting globalization, and relaxing regulations on Wall Street and corporate America. Since the Clinton administration the Democrats has become largely driven by politics to regain and consolidate power. This has been possible became a sizable contingent of the Democratic base has become affluent in the last several decades and now are part of the investor class that is sympathetic to capitalist dogma. The media and the current administration are classic examples of this contingent.

The principle remaining ideology in the Democratic Party is its fight against discrimination on the basis of race, gender, and sexual orientation. The DLC contingent now largely shares the GOP ideology on globalization, deficits, war, and global hegemony. It is likely to cause a schism in the Democratic Party similar to what has occurred in the GOP.

Buy this Book

This is an excerpt from the book to show why this book is the best explanation of the financial crisis and its causes.  You will be hearing much about it in the future. Get it now and see for yourself. Paul Craig Roberts is an economist who was Assistant Secretary of the Treasury during the Reagan administration. His website is here.

Roberts, Paul (2013-02-24). “The Failure of Laissez Faire Capitalism and Economic Dissolution of the West” Atwell Publishing.

An Introduction by Paul Craig Roberts

Note to reader: This book was first published in the German Language in July 2012 by Weltbuch Verlag in Germany, Austria, and Switzerland under the title, Wirtschaft Am Abgrund. A Chinese language edition is forthcoming from SDX Joint Publishing Company in Beijing, China.

The collapse of the Soviet Union in 1991 and the rise of the high speed Internet have proved to be the economic and political undoing of the West. “The End Of History” caused socialist India and communist China to join the winning side and to open their economies and underutilized labor forces to Western capital and technology. Pushed by Wall Street and large retailers, such as Wal-Mart, American corporations began offshoring the production of goods and services for their domestic markets. Americans ceased to be employed in the manufacture of goods that they consume as corporate executives maximized shareholder earnings and their performance bonuses by substituting cheaper foreign labor for American labor. Many American professional occupations, such as software engineering and Information Technology, also declined as corporations moved this work abroad and brought in foreigners at lower renumeration for many of the jobs that remained domestically. Design and research jobs followed manufacturing abroad, and employment in middle class professional occupations ceased to grow. By taking the lead in offshoring production for domestic markets, US corporations force the same practice on Europe. The demise of First World employment and of Third World agricultural communities, which are supplanted by large scale monoculture, is known as Globalism.

  For most Americans income has stagnated and declined for the past two decades. Much of what Americans lost in wages and salaries as their jobs were moved offshore came back to shareholders and executives in the form of capital gains and performance bonuses from the higher profits that flowed from lower foreign labor costs. The distribution of income worsened dramatically with the mega-rich capturing the gains, while the middle class ladders of upward mobility were dismantled. University graduates unable to find employment returned to live with their parents. 

The absence of growth in real consumer incomes resulted in the Federal Reserve expanding credit in order to keep consumer demand growing. The growth of consumer debt was substituted for the missing growth in consumer income. The Federal Reserve’s policy of extremely low interest rates fueled a real estate boom. Housing prices rose dramatically, permitting homeowners to monetize the rising equity in their homes by refinancing their mortgages.  

Consumers kept the economy alive by assuming larger mortgages and spending the equity in their homes and by accumulating large credit card balances. The explosion of debt was securitized, given fraudulent investment grade ratings, and sold to unsuspecting investors at home and abroad.  

Financial deregulation, which began in the Clinton years and leaped forward in the George W. Bush regime, unleashed greed and debt leverage. Brooksley Born, head of the federal Commodity Futures Trading Commission, was prevented from regulating over-the-counter derivatives by the chairman of the Federal Reserve, the Secretary of the Treasury, and the chairman of the Securities and Exchange Commission. The financial stability of the world was sacrificed to the ideology of these three stooges that “markets are self-regulating.” Insurance companies sold credit default swaps against junk financial instruments without establishing reserves, and financial institutions leveraged every dollar of equity with $30 dollars of debt.  

When the bubble burst, the former bankers running the US Treasury provided massive bailouts at taxpayer expense for the irresponsible gambles made by banks that they formerly headed. The Federal Reserve joined the rescue operation. An audit of the Federal Reserve released in July, 2011, revealed that the Federal Reserve had provided $16 trillion--a sum larger than US GDP or the US public debt--in secret loans to bail out American and foreign banks, while doing nothing to aid the millions of American families being foreclosed out of their homes. Political accountability disappeared as all public assistance was directed to the mega-rich, whose greed had produced the financial crisis.

The financial crisis and plight of the banksters took center stage and prevented recognition that the crisis sprang not only from the financial deregulation but also from the expansion of debt that was used to substitute for the lack of growth in consumer income. As more and more jobs were offshored, Americans were deprived of incomes from employment. To maintain their consumption, Americans went deeper into debt.  

The fact that millions of jobs have been moved offshore is the reason why the most expansionary monetary and fiscal policies in US history have had no success in reducing the unemployment rate. In post-World War II 20th century recessions, laid-off workers were called back to work as expansionary monetary and fiscal policies stimulated consumer demand. However, 21st century unemployment is different. The jobs have been moved abroad and no longer exist. Therefore, workers cannot be called back to factories and to professional service jobs that have been moved abroad.

Economists have failed to recognize the threat that jobs offshoring poses to economies and to economic theory itself, because economists confuse offshoring with free trade, which they believe is mutually beneficial. I will show that offshoring is the antithesis of free trade and that the doctrine of free trade itself is found to be incorrect by the latest work in trade theory. Indeed, as we reach toward a new economics, cherished assumptions and comforting theoretical conclusions will be shown to be erroneous.  

This book is organized into three sections. The first section explains successes and failures of economic theory and the erosion of the efficacy of economic policy by globalism. Globalism and financial concentration have destroyed the justifications of market capitalism. Corporations that have become “too big to fail” are sustained by public subsidies, thus destroying capitalism’s claim to be an efficient allocator of resources. Profits no longer are a measure of social welfare when they are obtained by creating unemployment and declining living standards in the home country.  

The second section documents how jobs offshoring or globalism and financial deregulation wrecked the US economy, producing high rates of unemployment, poverty and a distribution of income and wealth extremely skewed toward a tiny minority at the top. These severe problems cannot be corrected within a system of globalism.

The third section addresses the European debt crisis and how it is being used both to subvert national sovereignty and to protect bankers from losses by imposing austerity and bailout costs on citizens of the member countries of the European Union.  

I will suggest that it is in Germany’s interest to leave the EU, revive the mark, and enter into an economic partnership with Russia. German industry, technology, and economic and financial rectitude, combined with Russian energy and raw materials, would pull all of Eastern Europe into a new economic union, with each country retaining its own currency and budgetary and tax authority. This would break up NATO, which has become an instrument for world oppression and is forcing Europeans to assume burdens of the American Empire.  

Sixty-seven years after the end of World War II, twenty-two years after the reunification of Germany, and twenty-one years after the collapse of the Soviet Union, Germany is still occupied by US troops. Do Europeans desire a future as puppet states of a collapsing empire, or do they desire a more promising future of their own?

Roberts, Paul (2013-02-24). The Failure of Laissez Faire Capitalism and Economic Dissolution of the West  Atwell Publishing.

Get it now!

High Noon in America

The Republicans have demonstrated over and over again that they want to dismantle the safety net and deregulate the economy so wealth can be concentrated even more in the hands of a few. Supposedly, the Democrats stand for maintaining the safety net, regulating the economy, preserving the hard fought gains of the new deal, and reducing inequality.

Once Republicans took over the Congress in 2010, Obama's main goal was obtaining a compromise with Republicans. How did that work out? Now there has been an election where the people of the country reelected Obama, a signal that he should fight for Democratic Party principles. So what does he seek now? More compromise.

What we have here is one party that is standing by its principles, however wrong they may be, and another party whose main goal appears to be compromising with a party whose principles they disagree with. Has the Democratic approached worked? You be the judge.

There comes a time when nothing is gained by trying to be the lite version of the other party. It's time Obama and the Democrats learned this. They have to relearn the lessons that FDR taught them. They must stand on principle, call out the Republicans, and make the case for their own supposed philosophy of governing.

It's high noon in America. What we need is a showdown between the two parties, standing on the principles they espouse in their platforms, not a stand on principle by one party and an attempt at compromise by the other. May the best party win!

Countering Private Bank Money Creation

In the last post we discussed how banks create new money from debt to augment their income. The problem with this is that private entities are allowed to make investment decisions which may not result in a better outcome for the country as a whole, but  simply augment the wealth of their investors and executives, resulting in a concentration of wealth and asset bubbles that destabilize the economy.

There are two ways to counter this to create an outcome that is more in the interest of all the people. One way is to simply tax away the income and use it to fund more productive uses that are more in line with long term stability, such as improving infrastructure, education, health care, retirement security and income tax breaks or income augmentation for those who have been damaged by the concentration of income from the private bank decisions. Another way, advocated at the Positive Money site in the UK, is to adjust reserve requirements and separate transactional money requirements from investments involving risk.

Requiring banks to meet higher reserve requirements will allow some of the money creation to occur as base money creation and not private money creation, with that portion of the income from the debt going to the government where it can be applied to more productive uses and counter the inherent wealth concentration of purely private money creation that leads to economic instability.

The details of the Positive Money proposal are available in a video here and summarized in text here.

A Problem With Our Monetary System

There is a major problem with our monetary system that few people, even financial experts and economists, either don’t understand or refuse to confront.

The principle creators of our money are private banks that have incentives to act in their own interest, not the public interest. The overwhelming percentage of our money is created through the issuance of debt, unconstrained by anything but a lack of eligible debtors. And, even that doesn’t stand in the way when wins can be privatized and losses socialized.

Essentially free money is available to fund debt that need not even contribute to productivity, but instead can be used for unproductive speculation, if the return is greater. There is no need to take the risks involved with financing new productive ventures when loans can be collateralized with valuable assets like real estate.

It’s a prescription for endless bubbles and crashes that continue to distribute income to a wealthy elite from the most needy of the population. When money is created from the issuance of debt, the holders of the debt will always be the most needy and the interest will always accrue to those with the wealth to fund the debt. Attempts to correct the problem will lead to more debt and an accelerating cycle of increasingly severe crises.

The problem is not a new one. It was addressed decades ago by people like Hyman Minsky and others, but current so-called financial experts, economists, and political leaders have forgotten history and plunge ahead toward certain catastrophe.

To understand the details of the problem watch this short video describing the problem, this series of short videos describing the details of the problem, or spend a couple hours watching the free film, “97% Owned”. This is the British version, but the U. S. is directly comparable.

Government Spending and Economic Stability

A very simple way to look at government spending is that the government is just another consumer and producer of useful services like the private sector. In fact, it constitutes about 20% of GDP, so when it cuts back on spending it's just like any employer or consumer cutting back, only with much greater effect. When the private sector is increasing its spending is the time for the government to cut back. When the private sector decides to save, it's time for the government to increase spending to make up the difference. If we want a stable economy, overall spending must increase at a rate comparable to the rate of increase in population. Government is not the problem. It's the solution in times of trouble in the private sector.