When I ran for the House of Representatives in 2012
((Wiki,
FEC)
I had never heard of Modern Monetary Theory (Wiki),
but learned about it while studying the federal
government. Of all the things I learned this by far is
the most important.
As far as I can tell the ideas of MMT have always been in
effect going back thousands of years. It's not like
something happened to change the rules. In my opinion
the observations done and papers written about how money works
had a constraint that was not accounted for and that was how
the value money was tied to gold (Spain) and silver (UK).
It was not until Nixon Shock in 1971 (Wiki)
that decoupled the price of gold from U.S. currency that the
constraint was removed. It took a couple of decades
after that for Warren Mosler (Wiki)
to see a critical ramification that a sovereign government
with it's own floating currency could only default on it's
government bond payments if it choose to default. That's
to say a government with a monopoly on it's own currency can
always print whatever amount of money it wants.
This made Warren and his investors a lot of money by buying
Italian government bonds in the early 1990s, i.e. prior to the
EU/Euro.
From his Wiki page: "He
stresses that federal spending is in no way constrained by
tax revenues, therefore the government will always be able
to make payments in its own currency, stating "Federal
Government checks don't bounce".He goes on to state
that any and all debt passed on to future generations will
never be burdensome, since they will undoubtedly consume
whatever is produced."
Note this is very different from the budget of a household,
state, county or city where they need to "pay for" whatever
they want to spend. This page is about federal monetary
policy and does NOT apply to states, counties or cities.
The EU was setup in such a way that they shot themselves in
the foot and so a key idea of MMT does not apply there (except
for the UK which did not go to the Euro. So the UK shot
themselves in both feet, leaving the benefits of the EU
without the problem of the Euro.
2024 April 16: Twitter:
Warren
on trade -
Purpose of Federal Taxes
I've discovered a number of reasons for the federal
government to tax. Not in any order.
To punish sins, i.e. a Sin Tax (Wiki).
The Wiki page says it's an excise tax, but I see it in a
much broader context. The old thinking was that
taxes were a way to "pay for" a related benefit. For
example Payroll taxes (Wiki)
we are told "pay for" Social Security retirement benefits
and Medicare coverage. But MMT teaches us that's not
the case. I see Payroll taxes as a tax on something
the U.S. government wants to punish.
To Stabilize the Business Cycle (Wiki).
Since the amount of Income Tax paid by individuals and
businesses is a function of their income (really it's
depends on spending because of tax breaks) it acts as an
automatic regulator of the business cycle. We want
automatic regulators of the business cycle and do not want
to rely on Congress to make new tax and spending laws on a
cycle to cycle basis.
To give value to the U.S. dollar. When money is
owed to the U.S. government the only acceptable payment
method is in U.S. dollars. You can not pay using
gold, silver or digital currency.
To create unemployment. This creates a demand for
the currency. In societies where there are no taxes
there is no unemployment.
Progressive Taxes work to lower inequality.
The Limit on Spending
The first thing people think of is that, given MMT, we can
have the federal government do whatever we want.
What's to stop them. The answer is inflation. If
the federal spending competes with private sector spending
it drives up the price. I think the limit relates to
provisioning what we want.
For example currently there's a move to increase the number
of electric cars in the hope that will reduce CO2 emissions.
But electricity is NOT a source of green energy, it's only a
way to move energy. If you want to replace all
gasoline use with electrical use you will need to more than
double the size of the electric grid. That includes
power generation stations, transmission lines and
distribution lines. If you also want to curtail
natural gas use by using electricity you will need to more
than triple the capacity of the electrical grid. (see:
Electric Cars).
Just adding electric cars will not work, much more needs to
be done.
For example if dental care is to be added to Medicare then
more dentists will be needed. The key problem is not
"paying for" it's provisioning.
Note that the Space Race (Wiki)
required a vast infrastructure and took ten years. A
big part of that was educating scientists, engineers and
many others to do what amounted to totally new job
descriptions. A similar thing happened when
Semiconductors became a product. A whole new crop of
people and equipment was needed.
I'm now (May2025) reading Three Days at
Camp David: How a Secret Meeting in 1971 Transformed the
Global EconomyRef 4.to see if there's a reference to
American hegemony. The idea of Tariff War (Wiki)
was a key part of Nixon Shock (Wiki)
not to get income from the tariff, but rather to use it as a
barging chip to get other countries accept a devaluation of
the dollar. Since classical economics (not MMT) thinks
the trade deficit is a bad thing.
The US dollar is the international Reserve Currency (Wiki).
Also see Wiki: Exorbitant
privilege, Triffin
dilemma - The Trump45 and Trump47 administrations
clearly do not understand these
Being a car guy I'm very upset by the damage LBJs 1964
Chicken Tariff (my cars web page)
is still doing to the US.
The Trump45 Tariff made my cost of PT06 connectors so high
I've quit making cables that use them.
Prior 2012 Issues MMT web page
This is a cut and paste of the MMT section from a
prior web page. I will be updating this section in the future.
PS Before finding MMT I spent many months studying a
book and idea titled The Global Minotaur (Wiki)
by Yanis Varoufakis (Wiki).
But, even after reading a book on Paul Volcker (Wiki)
I could not find evidence that Volcker's policies amounted to
American hegemony (Wiki).
The answer turned out to be MMT.
The Economy
The paragraph below on MMT came about after doing
a lot of reading about the Global Minotaur (Wiki)
which turns out to be a Greek myth (then and now).
MMT is a new way of looking at the economy of
countries. For sure it's a major paradigm shift (Wiki).
This means that it's difficult to convince people that hold
the old fashioned ideas of economics that the new way offers
a more accurate view. This is demonstrated by making
better predictions and explanations of factors that the old
view has been getting wrong for about four decades.
For about 200 generations of economists the monetary system
they were studying had an artificial constraint in that the
money was tied to either gold or silver. There have
only been 2 generations of economists looking at some
economies (like the US, Japan, China) where that's no longer
true. So it's easy to see how they missed the
underlying ideas of MMT.
Prior to 1971 there was "classical economics" but after 1971
everything changed, but most people are still working on the
old rules. If you don't know how something works then
it's hard to make predictions or fix a problem. It's
like a mechanic trained on a gas engine car horse
and buggy trying to work on an electric car. The
economic policies of political parties are grounded in the
old system and they can not "flip-flop" so have not adopted
MMT yet. But the time is coming when the failure of
the old ideas to work as predicted will be clearly seen and
a change will then occur. For example the idea that
the FED can influence "stability (aka: Inflation) or jobs is
false, but a lot of people still think it's true. Also
the national debt is a good thing now, but is now seen as a
bad thing. The idea that the federal government needs
to raise money to fund their spending programs is false.
Money based on gold and/or silver
ended in 1971. Prior to 1968 they could be changed
for silver, after than only into a Federal Reserve
Note.
"Silver Certificate (Wiki)
this certifies that there is on deposit in the
treasury of the United States of America One Dollar"
Note the Series (year) 1957 B on this case is not
the year printed but rather related to the year the
design was first introduced. The newest $1
silver certificate is this one.
The replacement Federal Reserve Notes now used are
not redeemable for anything. But they say
"This note is legal tender for all debts public and
private"
Scope
This is an idea that came about post 1971 (Wiki: Nixon
Shock), so does not agree with prior economic
theories that go back thousands of years. The
benefits of MMT apply only to sovereign governments where
there are no constraints on the money (for example not on
the gold standard) and the government is the issuer of the
money (not a user like the members of the EMU) . But
MMT can also be used to get insight into economies where
the benefits do not apply, such as the EU. The U.S.
federal government operates using MMT rules but elected
officials don't understand that. MMT does not apply
to the EU (Wiki),
states, cities or households. The key concept is
that when MMT applies the government can always pay for
what it wants, i.e. it's checks never bounce.
There's never a solvency issue.
I see MMT as a new framework or point of view in
understanding how the US (and other countries) economy
works. It is not a policy. That's so say how
someone uses the ideas of MMT depends on them. For
example the quantity (G-T) government spending minus
government taxes can be changed many ways. Bill
Clinton (Wiki)
made (G-T) negative, i.e. he paid down the national debt,
which MMT teaches us means he sucked money out of the
private sector, not a good thing in a healthy
economy. So how you raise or lower spending and/or
taxes is a policy decision. MMT allows you to
predict the impact based on (G-T).
Recognizing that MMT is the correct way of seeing the US
government financial situation does not mean that there
will be more money to spend but rather it makes much more
clear how fiscal and monetary policy work.
The mood of society today (2016) seems pessimistic.
For example the movie Requiem For The American Dream
(IMDB,
Netflix)
reinforces the pessimism. While American
manufacturing output is at an all time high in terms of
dollars, employment in the private sector is down about
30% from 20 years ago. That's to say there are a lot
(tens of millions) of people out of work. It's clear
that the private sector has traded jobs for profits and
they will not be the source of new jobs any time
soon. None of the presidential candidates has
presented a concrete program for job creation. But
MMT offers a lot of hope for job creation.
Reality vs.
Policy
I've heard from some people that they "don't like MMT"
because if the government "adopts" MMT they will end up just
printing a huge amount of money. This mistakes the
reality of how our economy works with a policy
decision. It's not that the government should adopt
MMT, but rather MMT explains how a policy will impact the
economy. MMT is a description of how the economy
currently works. For example the FED currently has: "
three key objectives for monetary policy in the Federal
Reserve Act: maximizing employment, stabilizing prices, and
moderating long-term interest rates. (Wiki)".
But after 1971 monetary policy has no effect on jobs, hence
after all the Quantitative Easing (Wiki: QE)
there has been no impact on jobs because the rules have
changed. In fact the only thing the Fed can do is
control the overnight interest rate. It does not have
any tools that will do anything else. There is talk of
just folding it into the Dept. of the Treasury since what it
does now is an automatic function.
If you don't know how something works and you try to fix or
modify it the results may not be what you expect. For
example if you believe that when your car is going down the
freeway it makes a lot of exhaust, so if you pipe the
exhaust back into the engine the car will run better, it
will not work the way you expect. A good understanding
of how things really work is necessary in order to make
changes that will work the way you expect. The
economic ideas prior to 1971 were sort of OK for their time,
but now no longer describe how the system really works.
Key Years
1776 - There were two revolutions, one summarized in the
Declaration of Independence (Wiki)
and the other in the book Wealth of Nations by Adam Smith (Wiki),
which is the basis of capitalism. (but with errors)
1946 - American Affairs Jan 1946 V VIII, No. 1 - Taxes
for Revenue Are Obsolete (pdf),
Beardsley Ruml, Chairman of the Federal Reserve Bank of New
York - The experience of W.W.II showed that the U.S.
could pay for the war without raising the needed revenue
from taxes. (for more see Other MMT references)
1960s - YouTube: The Spider's Web:
Britain's Second Empire | Documentary Film, 1:18:01,
IMDB,
2017- @36:30:
"The government asked Chase to setup a branch in Saigon
during the Vietnam war. As you can imagine it didn't
have windows. It was sort of a fortress. It
lost money but the government went to Chase because it
said 'If you don't get this money thrown off by the
military in Vietnam then it's going into French banks and
it will get to general de Gaulle (Wiki: US
dollar crisis) and you know what he's going to do
every month. He's going to cash it in for
gold. That's what the United States is trying to
stop." Michael Hudson (Wiki)
- also see an out take: The Origins of
Offshore (The Spider's Web deleted scene), 2:45
1971 - Another major revolution happened, but very few
people really understood the implications. It wasn't
until 1992 that Warren Mosler, the father of Modern Monetary
Theory (MMT) had an epiphany in relation to the bond market
in Italy where he understood better than the Italian
government that they could never default on their bond
payments because they were at that time a sovereign
government with a floating currency. That meant that
they could always pay their bills.
1998 - Forecast of 2008 Global Financial Crisis (Wiki): Goldilocks
and the Three Bears - the 3 bears are: Asian debt
deflation, belief that economy was strong 1996 - 1997,
Clinton budget surplus
1999 - Forecast of 2008 Global Financial Crisis: Can
Goldilocks Survive? - "Goldilocks is doomed"
forecast the Global Financial Crisis and cites the Clinton
budget surplus as the cause
2001 - Forecast 2009 European Union debt crisis (Wiki),
Rites
of Passage financial problems would happen in
the European Monetary Union (see EU below) in the exact way that
they transpired.
YouTube
talk: Warren Mosler, The Euro: past, present and
future. The Crossroads Workshop 1 in Zurich
2003 - Iraq War: taxes were not raised to pay for
the war, the government just wrote checks to pay for it
2003 - Convergence
Going In, Divergence Coming Out Default Risk Premiums and
the Prospects for Stabilization in the Eurozone - "Until something is done to enable
member states to avert these financial constraints (e.g.
political union and the establishment of a federal (EU)
budget or the establishment of a new lending institution,
designed to aid member states in pursuing a broad set of
policy objectives), the prospects for stabilization in the
Eurozone appear grim."
2007 The
Long and Short of It at Goldman Sachs (Ben Stein was
very wrong) - Jan Hatzius of
Goldman Sachs forecasts trouble with home mortgages based
on Wynne
Godley's Sectoral balances.
This is some years after the 1998 & 1999 papers making
the same case. I'm looking for the paper by Jan
Hatzius.
2008 - Alan Greenspan when asked if taxpayer money was
used to bail out the banks he said no, it was just
keystrokes.
Key Idea Governments operating under the MMT rules (see Scope
above) are the issuers of their currency. They
must spend money BEFORE they can collect it using
taxes. (see gold
below for how it used to be) The current misconception that
the federal government must tax in order to raise money so
they can spend it on government programs appeared to be true
prior to 1971, but that's no longer the case. This is
similar to a football stadium issuing tickets then
collecting them, in both cases the issue comes before the
collection.
Note that for a simple model of the economy where there is
only the government sector and the private sector (i.e.
assuming balanced imports and exports) any deficit in the
government sector is balanced exactly to the penny with a
private sector surplus. This is an accounting
identity, not a theory. It's like looking at a
transaction as if you are the government or the private
sector. So if the federal government balances the
budget, or worse runs a surplus, the private sector is
drained of money, that's not a good thing. Since it's
impossible for a government operating under the MMT scope to
bounce a check there's no problem with a deficit. In
fact if the economy is healthy you would expect the federal
deficit to grow. That's to say the surplus in the
private sector will grow.
The book The Deficit Lie points to the
1992 presidential debate where a question about how the
deficit personally effected Bush can not be answered, and
may be the reason he lost that election.
Trade
After W.W.II the U.S. invested heavily in Germany and Japan
rather than punishing them like Germany was punished after
W.W.I. Since W.W.II the US has imported many products
from Germany and Japan, and more recently from China.
The countries whose products we import are getting paid in
US dollars. The reason we are importing these goods is
because they appear to be a good deal to us and the sellers
are happy to get US dollars in exchange. There is some
current worry about the amount of US bonds and Treasury
bills held by China. But China can not ask the US to
cash in their bonds/bills in gold (see Scope above). Their
options are limited. They can buy US products or
exchange the US dollar denominated bonds/bills for some
other currency at the existing exchange rate. Note
that a large currency exchange will have the effect of
making the Chinese money stronger (which has been the desire
of the US government for a long time) thus making Chinese
imports more expensive and also making US exports to China,
Germany and Japan more attractive to them.
Trade allows for world wide competition so a free market
allows consumers to pay a lower price. So economists
say it's a good thing. But, when US workers compete in
a world wide market they loose their jobs. So, while
it's true that in an economic sense everyone is better off
(in terms of being able to buy goods at lower prices) it
comes at the expense of jobs that are permanently lost.
MMT offers a solution to the unemployment problem (see jobs
below). Classical economics offers no solution to
unemployment. That's to say classical economics has
blood on it's hands in terms of human suffering.
I expect that in the future a larger percentage of the
population will be permanently out of work. The
existing support structure for the unemployed is far from
adequate and needs to be improved.
Tax Implications
Prior to 1971 the government did need to use federal
taxes to fund their spending (see Gold
below), but that's very different since 1971.
I now think the ideas of MMT were in effect going back
thousands of years. It appeared like taxes funded
spending when the money supply was restricted by fixing the
price of gold.
Since there is no need to collect taxes in order to spend,
the policy of taxes can be seen in light of two ideas.
First, if the federal government did not require anyone to
pay them using US dollars then the currency probably would
not have value. So if somewhere the federal government
requires a payment in US dollars then the US dollar has some
value. Because MMT is such a new idea no one has
really determined what level of payments to the government
are required, if any, to give the US dollar official
value. Prior to 1971 this was not an issue.
Second, taxes should be used for progressive purposes and to
punish "evils" such as alcohol, tobacco or other things
society wants to discourage. So when the purpose of
taxes is seen in this light, payroll taxes are a very bad
idea. They penalize employers, employees, drive jobs
off shore and encourage replacing workers with
automation. So a very progressive income tax
would stop the extreme compensation packages that C-suite
executives now get. Prior to 1980 the marginal rate
was 80% now it's more like 15%. In my opinion is
should be 50.0%. I choose half because if the rate
goes over half then the taxpayer is encouraged to waste
money on buying tax losses. That's to say people do
stupid things when they are dealing with losses rather than
gains.
A really simple solution would be to eliminate all payroll
taxes and provide all citizens Social Security (medical then
retirement) benefits and eliminate all the current payroll
taxes and record keeping and replace that with an annual W2
statement of taxable income that would determine the
retirement benefit amount. Note "medicare for all"
greatly simplifies the current record keeping both for the
government and for the vendor (doctor, hospital,
employer...). I expect this simple idea would save
billions if not trillions of dollars in record keeping costs
alone. Currently every medical facility in the country
has a staff of people whose only job is to match up the
different insurance payment rules with the procedure the
doctor recorded. In a similar way employers have
record keeping expenses that really are not needed if this
simple idea was adopted.
National Debt
The interest on the national debt is seen as a problem, but
again a government operating under the MMT Scope there's no
need to raise money by borrowing (or taxing) in order to be
able to spend it. So no borrowing is needed "to fund
the debt" the government just makes the payments it desires.
Fallacy of the Money
Multiplier
When a bank makes a loan thus creating money (see Money
based on debt below), contrary to the current idea
that they are somehow restricted by the reserve requirement,
in fact the bank borrows whatever reserve it needs during
the next week's bank clearing cycle. The problem of
the bank lending only the principal amount (they do not lend
the money needed to pay the interest) is solved because the
other source of money is US government spending. The
idea of a money multiplier (Wiki)
is not valid because the reserve ratio (percent of loans
covered by reserves) is a false concept if the bank does not
restrict loans based on reserves. That's to say
changing the reserve requirement does not change the
multiplier.
MMT Textbook
The first college text book on MMT was published in 2016: Modern Monetary
Theory and Practice: An Introductory Text by Prof
W F Mitchell(Author),
Prof L R Wray(Contributor),
Prof
M J Watts(Contributor).
William Mitchell - Introduction
(16:02)
L. Randall Wray will discuss how the book treats Keynes
(36:02)
Martin Watts will consider some topics such as the labour
market and international trade.
(52:14)
MMT University background
(58:47)
Questions H. R. 2990 National
Emergency Employment Defense Act of 2011 - idea to
change the law to allow MMT - not passed
We reach an understanding of balance sheets and
banking
Part 3 National Income, Output and Employment
Determination
Keynes and the Classics
Effective Demand
Involuntary unemployment
AD and AS
Part 4 Unemployment and Inflation
Phillips curve.
Buffer Stocks - core MMT.
Part 5 Economic Policy in Open Economy
Core MMT
Fiscal space - real resources
Monetary Policy - balance sheets - reserves
Open Economy
Part 6 Economic Stability
Investment
Part 7
Part 8 Contemporary Debates
Range of topics
Macro and the GFC
Recap
Table of
Contents: Chapter 1:
Introduction & Measurement
Chapter 2: How to Think and Do Macroeconomics
Chapter 3: A Brief Overview of the Economic History and
the Rise of Capitalism
Chapter 4: The System of National Income and Product
Accounts
Chapter 5: Sectoral Accounting and the Flow of Funds
Chapter 6: Introduction to Sovereign Currency: The
Government and its Money
Chapter 7: The Real Expenditure Model
Chapter 8: Introduction to Aggregate Supply
Chapter 9: Labour Market Concepts and Measurement Chapter
10: Money and Banking
Chapter 11: Unemployment and Inflation
Chapter 12: Full Employment Policy
Chapter 13: Introduction to Monetary and Fiscal Policy
Operations
Chapter 14: Fiscal Policy in Sovereign nations
Chapter 15: Monetary Policy in Sovereign Nations
It is intended as an introductory course in macroeconomics
and the narrative is accessible to students of all
backgrounds. All mathematical and advanced material
appears in separate Appendices.
Introduction
April 2016 - just read The Seven Frauds book (Ref) and have a
bunch of MMT books on order.
Here's an introduction to the idea:
YouTube: L. Randall Wray -- MODERN MONEY: the way a
sovereign currency "works" & there are a number of
others by The Modern Money Network (YouTube).
Here are the pop quiz questions asked in the beginning of
the video:
1. Just like a household, the government has to finance its
spending out of its income or through borrowing. [ ]True
[ ]False
2. The role of taxes is to provide finance for government
spending. [ ]True [ ]False
3. The National Government borrows money from the private
sector to finance the budget deficit. [ ]True [ ]False
4. By running budget surpluses the government takes pressure
off interest rates because more funds are then available for
private sector investment projects. [ ]True [ ]False
5. Persistent budget deficits will burden future generations
with inflation and higher taxes. [ ]True [
]False
6. Running budget surpluses now will help build up the funds
necessary to cope with the aging population in the future. [
]True [ ]False
See answers below.
When the US left the gold standard (see Gold below) a profound
change occurred. Maybe because of the way Nixon made
the change most people did not recognize the HUGE
implications. It may be more accurate to say that
after 1971 how the economy really works was made
clear. It's not that the economy worked in a new and
different way after 1971, but instead it was easier to see
how it had always worked.
Keynes recommends deficit government spending (Wiki: Fiscal
Policy) when there's a recession as does MMT.
But a faster way would be to reduce taxes, for example
have the U.S. Treasury (Wiki)
pay both employer and employee FICA (Wiki)
taxes. The idea is that if the FICA taxes were
eliminated the determination of Social Security benefits
would be difficult, but with the Treasury paying the
records would be as they are now. Note that there's
no problem funding Social Security (Wiki)
since the U.S. is a sovereign country and our money is not
constrained to gold or the euro. Note that
employment taxes hurt the economy, not what you what any
tax to do, by penalizing employers, employees and drives
jobs off shore and encourage automation.
But the idea that lowering interest rates (Wiki: Monetary
Policy, Quantitative
easing) will stimulate the economy is wrong "you can
not push a string" (Wiki).
If a business has no customers they don't care what the
interest rate is. Getting out of a depression or
recession requires fiscal policy adjustments.
A sovereign government (U.S., Japan, Turkey, &Etc.
but not EU) puts money into circulation by spending.
Banks can also generate money but that's a small fraction
of the total money. The money has value because it's
what's needed to pay taxes and other government fees.
The purpose of taxation is not to raise money but rather
to control the economy. The government funds
whatever it wants to do directly. For example to pay
for a war the government just writes checks to it's
suppliers. There was not a tax increase to pay for
the recent wars. The old idea that taxes are needed
to pay for government programs is just flat out wrong.
The government buys some goods and services and what's
left the private sector can buy. In a hot economy,
where the government competes with the private sector for
goods and services inflation results.
The standard of living for U.S. citizens depends on the
sum total of goods and services provided in the U.S. plus
what is imported less what is exported. Imports
improve the standard of living for those getting
them. When China (or anyone) exports to the U.S.
they are paid in U.S. denominated currency
(dollars). They can use those dollars to by treasury
bonds which is many believe is funding the U.S. deficit,
but that's not the case. Suppose they get mad at us
what can they do: buy stuff in the U.S., get U.S. paper
money to take back to China, exchange U.S. dollars into
some other currency. If the later that would cause
the exchange rate between China and the U.S. to change
making the dollar weaker and Chinese goods more
expensive. But the U.S. has been trying to get China
to increase the value of their money for many years and if
they changed their dollars to something else it would have
that effect, i.e. making Chinese imports more expensive
and U.S. products less expensive.
EU
MMT predicted the problem with the EU in 2001, see Key Years
above.
When the EU (Wiki)
was setup the European Central Bank (Wiki)
was setup to maintain price stability. But in times of
recession the central bank needs to pump money into the
economy, but the ECB does not have this power (limited to 3%
of GDP) and the member countries in the EU do not have that
power. The problems will continue until there's a way
to deficit spend money into circulation. The IMF (Wiki)
was founded at the Bretton Woods conference and was intended
to work along side a gold standard, the Marshall Plan and
other economics of the 1945 time frame, not the post 1971
non gold standard times. It appears that the IMF is
causing much more harm than good and needs to be shut down
or totally revamped to take into account MMT.
Note the ECB only has monetary policy tools (Wiki),
it does not have fiscal policy tools. MMT (or
Keynes) tells us that fiscal policy is needed it time of a
debt crisis (Wiki)
but the EMU has no fiscal policy tools.
The Stability Growth Pacts (Wiki)
limit the debt of an EU member government so they can not
use fiscal policy to recover from a recession. The
2005 reform still kept the ceilings of 3% for budget deficit
and 60% for public debt were maintained.
Falsification of neoliberal
economics
2018 August 14 - The Week: The
biggest policy mistake of the last decade by Ryan
L. Cooper - This article is the first one I've seen
that goes to the idea of falsification that Karl Popper
(see Progress
& Science) says is a good way to disprove
something. Note that Ryan does not invoke MMT, but
everything he is saying is consistent with MMT.
The following "economists" got it very wrong:
Alberto Alesina (Wiki)
and Silvia Ardagna (Wiki)-
"expansionary austerity," arguing that governments could
increase taxes, cut spending, and grow strongly. (cherry
picked data)
Carmen Reinhart (Wiki)
and Kenneth Rogoff (Wiki)
- demonstrated an apparent trigger point of a 90 percent
debt-to-GDP level beyond which more borrowing would cause
economic stagnation (Causality backwards)
European countries that subjected themselves to severe
austerity regimens saw their employment
and production collapse, just like Keynes would have
predicted
Michael Boskin (Wiki
- Stanford), John Cogan (Stanford),
Niall Ferguson (Wiki
- Stanford),
Kevin Hassett (Wiki)
Douglas Holtz-Eakin (Wiki),
Bill Kristol (Wiki),
and John Taylor (Wiki)-
signed open
letter to then-Fed Chair Ben Bernanke warning that
"[t]he planned asset purchases risk currency debasement
and inflation."
Tyler Cowen -book: The Great Stagnation: How
America Ate All The Low-Hanging Fruit of Modern
History, Got Sick, and Will (Eventually) Feel Better
Robert Gordon - book: The Rise and Fall of American
Growth The U.S.
Standard of Living since the Civil War The two books argue ... that the slow post-recession
growth problem was a structural one caused by lack of
innovation, meaning the economy was running up against
supply constraints. We simply couldn't grow any
faster."
If the above "economists" were correct then we would be
seeing hyper inflation, but that's not happened then or
now and if fact inflation is low. Barack Obama - claimed a "skills gap" (NYT:
16:30 Training Skilled Workers) Bill
McBride - "stay-at-home dads"
There's been no real wage growth to support the above two
labor ideas. "There was no skills gap, nor an innovation
shortage, nor an explosion of stay-at-home dads."
All the above "experts" got it very wrong.
The Deficit Lie: Exposing
the Myth of the National Debt by Rick Boettger, 1994 (The
Blue Paper?)
This book was published in 1994, probably before
the term "Modern Monetary Theory" was coined.
Written during the Clinton high tax low spending years (Wiki).
Major Points:
1. The so-called "deficit" is a myth.
2. Our only problem is a shortage of cash.
3.The solution: Spend more and tax less.
In chapter 5 " The Big Lie: The inflationary Obsessions of
the Economic Anorexics" Rick points out Milton Friedman's
false idea that inflation is caused by the money supply
without taking into account the total of goods and
services. Instead he has illustrations (Fig 6 Good
Balance, Fig 7 Inflation Hawks' Nightmare, Fig 8 Recession
& Fig 9 Better Balance) showing a balance scale
where goods and services are on one pan and money on the
other pan. It is not just the money but rather the
balance between the money and goods and services that's
important in relation to inflation. A rough cut is that
the deficit should be about the size of the GNP (Wiki).
Mentioned is the 1992 presidential debate (CNN: | Clip Of Presidential Candidates Debate)
where an audience member asks “How has the national debt
personally affected each of your lives?” (Perot, Bush
& Clinton), “And if it hasn’t, how can you honestly
find a cure for the economic problems of the common people
if you have no experience in what’s ailing them?”
When Bush answers he hems and haws, i.e. has no answer.
The moderator changes the question for Clinton to "I think
she means more the recession -- the economic problems
today the country faces rather than the deficit." which
Clinton easily answers. The book makes the point
that a tax cut and/or government check to someone, i.e.
things associated with the national deficit, are good
things for the people who receive them. The woman
who asked the question mistakenly thought the financial
hardship her friends were suffering was caused by the
deficit. But in fact the deficit is a private sector
savings, a good thing.
Steve Keen:
Debunking Economics: The Naked Emperor of the Social
Sciences, 2001 -
John Quiggin: Zombie
Economics: How Dead Ideas Still Walk among Us,May 6, 2012,
Andrew Yang for President 2020
While not an MMT person, Yang's ideas about the current
state of the U.S. and his vision for our immediate future
seem spot on. But his support of Universal Basic
Income is not as good a solution as the Job Guarantee.
See this YouTube:Joe Rogan
Experience #1245 - Andrew Yang (1:52:02) - YouTube - CGP Grey: Humans Need Not
Apply, Aug 13, 2014
MMT References (and those who
seem to be in line, but not necessarily promoting MMT)
00:00 Go!
00:03:05 Do interest rates actually influence inflation?
00:11:36 Purpose of taxes is not what you think
00:19:26 Economy as faith based activity
00:27:22 Feds have no idea where money comes from?
00:37:33 Fed lacks tools to control inflation
00:53:37 Interest at the Treasury is unnecessary
01:07:00 Informed democracy & decision making
01:20:15 Michael Hudson
01:25:11 Why are we poorer despite the GDP?
01:41:53 Weimar repeat possible?
02:06:44 Threats from external economies?
02:28:58 Oil demand can't be ignored
The ferry is like a pair of boats at the front and a pair
of boats at the rear connected by a beam that holds the
passengers. The provides a much more comfortable
ride than a single hull boat in the same way as a long
wheelbase truck is more comfortable than one with a short
wheel base. Also the stresses are much lower than
those on a single hull boat where waves are trying to
break it. QE IV Ferry -
Italy
Then and Now.pdf 2012 by Warren Mosler - how
joining the EMU caused a lot of problems for them. "The euro
zone is in 'Ponzi' until the ECB writes the check"
Rites
of Passage 2001 by Warren Mosler predicting the
problems now facing the Euro - "The market’s arrows will
inflict an initially narrow liquidity crisis, which will
immediately infect and rapidly arrest the entire euro
payments system."
(19:29)
"MMT is prepared to answer the new questions that come
up." Low interest rates create savings desire.
(24:03)
Zimbawae & Reimar Germany - MMT has the only valid
of explanation of inflation.
The currency is a monopoly. The people need the
government's money in order to pay taxes.
Better price stability if there's a buffer stock of
workers rather than unemployed people.
Right now we are using unemployment to control inflation
but it does not do a good job.
A "buffer stock of workers" (job guarantee) will do a
better job.
(24:21)
Fox Business News - Stewart Varney (Wiki):
Spending
Necessary for Economic Recovery - Mosler asks
for a payroll (FICA) tax holiday (0:35) and the host
says "hold on, hold on, you want more spending".
The idea "printing money" is based on the linkage
between gold and currency and is no longer a valid
concept.
(25:39)
MMT is the only valid explanation of inflation there
is. There's no dispute about.
(29:27)
the book "Soft Currency Economics" has not had any part
refuted. Sound bites: "the public debt is just the
Dollars spent by the government that has not yet been
used to pay taxes." "The only financial problem related
to the debt is inflation."
(35:29)
FAQs:
How are you going to pay for it? Credit account at
the central bank just like all government spending.
Aren't taxes required to fund the spending? No.
Would this cause inflation? It might, but the
Fed's inflation target is higher than where we are now,
so a good thing.
Why do politicians not switch to MMT? Because the voters
have not yet embraced it.
How does Social Security work? Just accounting, not
money.
Should the Fed be ended? All profits go to
Treasury. Fed works at the whim of Congress.
How about the effect on the dollar? The exchange rate
changes independently of us.
There's no unemployment in non monetary societies
(animals or human).
If CBO scored medicare for all inflation would not
change or go down.
GOP tax plan - not a favor to corporations, it's
political, all corporate taxes are a pass through to
consumers
(5:25)
Sanders came out with medicare for all but adds big tax
to pay for it - medicare for all is deflationary, no tax
needed. Headline left botched it. Paul Krugram,
Dean Baker are other examples of left not understanding.
(26:55)
Bitcoin - does not contribute to medicare for all or any
other social program, it's just a money substitute.
(49:52)
Petro Dollar (aka: reparation) - nonsense -
apple example where their money is located makes no
difference, no liquidity problem,
(1:00:42)
"The public debt is the public money supply." Example:
coins found in public places in Pompeii. The
government spent those coins and the taxes did not
collect all of them so leaving some in private hands.
2025 Mar 1 YouTube: The
Biggest Lie About Debt Exposed: Why U.S. Can Never Go
Broke | Warren Mosler, 51:26 - David Lin seems to not
listen or understand what Warren is saying which I found
irritating. Maybe his focus is promoting ways to make
money in the markets and he doesn't like what Mosler is
saying? But Warren's answers are very up to date and
so this is a great video to watch in the current Trump
tariff environment
@15:08
comment by Scott Bessent Sec of Treas (Wiki):
"... emphasize is that we are not focused on weather the FED
is going to cut or not cut. What we're focused on is
lowering rates. So we are less focused on the specific
rate cuts and how do we get the whole curve down. I
mentioned that the ten year (bond) I believe is the
important price to focus on. It's mortgages, it's
long-term capital formation. So look, I think with the
president's policies of energy dominance, deregulation and
non inflationary growth I think that the ten year (bond) is
naturally come down and then on top of it what if we do get
some big savings on the spending side from the DOGE
programs? Let's think of a naive formula: Government =
Spending - Taxes. For my entire career and beyond,
maybe even back to pre FDR, Government = Spending - Taxes,
the S, the Republicans, but we like spending we just wanted
to raise it less. The Democrats want to raise it
more. Taxes: Democrats want tax increases we
want tax cuts. What nobody is thinking about is what
is the S actually went down? What if it actually goes
down because of everything we're doing right now?
@16:53
Waren Mosler comments: I'm not sure where to start with all
that. Except, you know, I wouldn't have that guy
making coffee in my office. But (laughing) ....
So look, What we have, because he's got the sequence
backwards, he comes with that kind of stuff. That
comes from having the Margaret Thacher sequence you know in
your head which is backwards. When you have the
sequence the correct way around, that the money to pay taxes
comes from the government, (then) you know, you don't think
of it that way and so you don't cause the same problems in
the economy that he does. But the first thing he
talked about was interest rates, OK? So, let me uh, I
thought you were gonna be asking me about that. Do you
want me to skip that part or do you wanna [David Lin: no you
can comment on that.] OK so, why does he want interest rates
to come down? The ten year (bonds) is about 4.5%, the
overnight rate's about 4.5%. I don't know how low he
thinks it'll come down if they leave the overnight rate
there; a few basis points? I remember when I was your
age back in the late 1970s when mortgages were 15% and we
had twice as many housing starts per capita than we have
now. It's not exactly twice as many but was way up
there OK, with 15% to 16% interest rate. I was on the
phone to somebody (it was in the 90s I think) and I was
talking to somebody in Australia, a real estate agent, and I
said 'how's the housing market?' He said, well rates are
17.5% but it's still pretty good. I think if we put
them up to 18% we're going to kill it. Then I'm on the
phone to somebody in Japan. I was trading JGBs at the
time and said 'How's the housing market?' He says it's
pretty sluggish, rates are at 3.5% and I think if we lower
them to 3% it'll geet going here. So look, the
interest rate is not the key thing in the housing market,
except in the very short term. And this guy coming up
here and saying that we're going to, we want this policy to
bring the ten year note down a quarter of a percent or
something. Why interest rates, I don't know.
But there's a more fundamental problem with interest rates
that I started pointing out when the FED started it's rate
hike policy. And that is they've got the whole thing
backwards because our public debt is so high. All
right, what that means is when they raise rates they're
actually making the economy stronger. When they lower
rates they're actually making the economy weaker.
Which is exactly what's happened for the last three years.
As they raised rates the economy got stronger, unemployment
came down and they couldn't figure it out. Their
forecasts wrong time and time again. (the FED said:)
Our models aren't working they're broken. But the models are
working their assumptions in the modes are what's
wrong. Let's take a close look at what interest rates
actually do. What happens when the Federal Reserve
raises rates? The only thing that happens at the
governmental is the government pays more interest on the
public debt. 36 Trillion in the public debt now.
So when they raise rates they have to pay more on
that. A lot of it is short term and they pay more
immediately. Some of it's longer term (and) when those
bonds come due and they sell the new ones and they have
to pay more interest at that time. But they have
to pay more interest. and what we've seen after they
raise rates as the government interest expense go straight
up! It's gone from four or five hundred billion a year
to over 1.2 Trillion. It's become the largest expense.
So, when the FED decides to raise rates the government
spending to pay interest goes up dramatically now because
the debt's so high. And that is all deficit
spending. They don't raise rates and then put a tax in
place to pay for the interest. They just plain old
raise rates. And so deficit spending goes up. So if
you look at today's deficit spending of 1.8 Trillion
annualized; I think it was. 1.2 Trillion this year is
gong to be interest expense. That's like 60% of it or
something. The interest expanse the Federal Reserve
created by raising rates. So most, more than half of
the deficit spending today, that is causing the potential
inflation problem and is supporting prices (inflation) and
is keeping unemployment low (by the way) is the deficit
spending created by the interest rate hikes. And
lowering interest rates would take away that deficit
spending. So if you want to cut, if they ask me how
would I cut deficit spending over the next 10 years I'd say
go to a permanent zero rate policy like we had for seven oir
eight years under chairman Ben Bernanke (Wiki).
You know I'll cut 10 Trillion dollars in interest expanse
right there. Rates go down and the government stops
paying it... You've never even heard that discussed, right,
as a possibility. And that's the largest source right
now of the deficit (and) it's not even being discussed!...
Here's the problem with it. You say OK it helps the
economy, it raises rates, you know people will have an extra
1.2 Trillion in spending, but it's the most obscenely
regressive public you can imagine! Who gets
interest? Only people who already have money.
Interest is paid on bank and treasury securities.
People with money. If you don't have any money you
don't get any interest. Right, so the Federal Reserve
has decided unilaterally to fight inflation by paying out 1.2 Trillion dollars a year to
only people who have money in proportion to how much they
already have. And that's how they are fighting
inflation! It's like WHAT, who voted for this?
OK, only the FED. Would Congress have voted for
it? Sure, you haven't seen them oppose that. You
know chairman Jerome Powell (Wiki)
just was in front of Congress. Nobody questioned why
are you paying out 1.2 Trillion dollars in annual deficit
spending only to people who have money in proportion to how
much they already have. How does that effect the
distribution problem you're taking about? It's
huge! It's the largest factor out there. It's
the low hanging to get rid of the distribution problem and
it isn't even discussed. You know it isn't remotely
discussed by anyone in either party. OK, including
this great DOGE agency that's supposed to be cutting
spending. It's the low hanging fruit and they're
completely ignoring it. You know, what's going on
here?
June 2023 book on order: Making Money Work for Us: How MMT Can Save America,
Pub Nov 2022, 224 pgs, ISBN-13 : 978-1509554263
Mar 15, 2018 YouTube - Deficit Owls: What Caused The Global
Financial Crisis? Understanding
Modern Money:The Key to Full Employment and Price
Stability 2006 by L. Randall Wray (free
KindleUnlimited version)
MMT, The Euro and The Greatest Prediction of the
Last 20 Years (free
html) based on a 1992 article by L. Randall Wray -
predictions of MMT
Modern Money Theory: A Primer on Macroeconomics for
Sovereign Monetary Systems 2nd Ed - 2012,
2015, L. Randall Wray, Palgrave MacMillian, ISBN
978-1-137-53990-8 (see on line as MMT
Primer, including responses to readers comments)
pg 131; "A government that operates with a
nonsovereign currency, using a foreign currency or a
domestic currency convertible to foreign currency (or to
precious metal at a fixed exchange rate) faces solvency
risk. However, a government that spends using its
own floating and nonconvertible currency cannot be forced
into default. ... This is why a country like Japan
can run government debt-to-GDP ratios that are more than
twice as high as the "high debt" Euro nations (the
"PIIGS": Portugal, Ireland, Italy, Greece and Spain) while
still enjoying extremely low interest rates on sovereign
debt."
pg 141: "Ideally, it is best if tax revenue moves counter
cyclically - increasing in expansion and falling in
recession. That helps to make government's net
contribution to the economy counter-cyclical, which helps
to stabilize demand."
Why Minsky Matters: An
Introduction to the Work of a Maverick Economist– November 3, 2015, by L. Randall Wray - looks good on the
free Amazon preview - goes into why classical
economists did not see the GFC coming, but Minsky did.
Cites The Financial Crisis Inquiry Report (Commission)
listing the causes (see Commodity Futures
Modernization Act of 2000bad laws
above).
"...Minsky argued that the internal dynamics
of our modern economy are not
equilibrium-seeking. There's no invisible hand
operating that way. Furthermore, if we ever did
achieve the mainstream's beloved "equilibrium," those
internal dynamics would push us away - the system is
not stable."
"...- offered an alternative to the Kennedy-Johnson
orthodox Keynesian-based War on Poverty. From
the beginning, Minsky argued that this "war" would
fail because it did not contain a job creation
component. For Minsky, the solution to most
poverty is to eliminate involuntary unemployment. . .
. Minsky believed that maintenance of full employment
and reduction of poverty and inequality were essential
to promoting financial and economic stability."
"The stagflation of the late 1970s ended the great
debate between "Keynesians" and "monetarists" in favor
of Milton Friedman's rules. This is because the
Keynesians had no answer to a problem of high
inflation and high unemployment at the same time -
policy should stimulate demand to fight unemployment
but should slow demand to fight inflation. They
had no answer to stagflation (Wiki).
Policy adapted the monetarist recommendation of
focusing on controlling money growth by sticking to a
rule.
Yet, monetarism itself suffered a defeat in the early
1980s when the Fed under Charmian Volcker tried to hit
money growth targets (in line with Friedman's
prescription) but repeatedly failed to hit them.
So not only did "Keynesian" theory and policy fall out
of favor, but monetarism also lost sway.
This then set the stage for the rise of a succession
of increasingly radical theories rooted in the
pre-Keynesian thought - most notably the rational
expectations-new classical economics of Robert Lucas (Wiki) and the
real business cycle theory of Charles Plosser (Wiki)
and others."
Labor and the War Against Poverty by Hyman Minsky
April 19-20, 1965 (before the Nixon Shock) - The
Johnson-Kennedy plan will fail because there's no
provision for job creation. In the section
titled "Cross of Gold" (pg 11) he points out the
problem of the interest rate being set to maintain the
fixed exchange rate translates into unemployment.
"There is nothing wrong with a 6 per cent
interest rate, at a 1-1/2 per cent unemployment
rate. There is something wrong with high
interest rates at a 5 per cent unemployment
rate. We want an economy with so much steam in
it that you have to hold it back by tight money, but
you don't want to hold back an economy with a lot of
slack in it. That is what we've been doing."
"The elimination of the barrier to expanding
aggregate demand due to the international monetary
system is simple: get rid of the gold standard."
Securitization
by Hyman P. Minsky 1987 with Preface & afterword
by L. Randall Wray -
Vimeo - 2016 - The
Radical Imagination: Imagining Economics in an Age
of Stein, Clinton, Trump or Johnson - 2015 Lyons
Lecture: What is Wrong With the Euro? - MMT has
long argued that the EMU was designed to fail.
This is not a Greek problem. It is not an Irish
problem. It is not an Italian problem. It
is a Euro problem - and the inevitable crisis could
have been foreseen (indeed was foreseen) even before
the launch of the new currency.
Barter story (no evidence)- Goldsmith-Bank story (no
evidence). Alternate idea historical artifacts
that appear to be stones, bones, with scratches,
then tokens that can be pressed into clay tablets
(invention of writing) used for monetary contracts.
Money came before writing. Money invented to
keep accounts not for exchange. Crown spending
and tax collection used up to 1830, it was not gold
coins. Because of the existence of writing for
the past 4,000 years we know that the barter story is
not true. "Can not have a European Fiscal Union,
only a Monetary Union because of mistrust, but both
are needed, like in the U.S." (about 1:10:00)
Theoretical basis of MMT:
Georg Friedrich Knapp (Wiki)
- The State Theory of Money 1905 - money must have
no intrinsic value and strictly be used as
governmentally-issued token, i.e., fiat money.
Abba P. Lerner (Wiki)
- Functional Finance 1943 (Wiki)
- government should finance itself to meet explicit goals,
such as taming the business cycle, achieving full
employment, ensuring growth, and low inflation.
Beardsley Ruml (Wiki)
- Taxes for revenue are obsolete (free
pdf) 1946 - We learned from W.W. II that taxes
do not fund spending.
Hyman Minsky (Wiki)
- Financial Instability Hypothesis (Wiki)
- "Stability is destabilizing". 3 types of borrowers:
hedge borrowers, speculative borrowers & Ponzi
borrowers. People are momentum investors by nature,
not value investors.
Alan Greenspan (Wiki)
- the Greenspan put (Wiki):supposedly
eliminated risk in the financial markets, but, according
to Minsky, that increased risk. "Matt Taibbi
described the Greenspan put and its bad consequences
saying: "every time the banks blew up a speculative
bubble, they could go back to the Fed and borrow money at
zero or one or two percent, and then start the game all
over", thereby making it "almost impossible" for the banks
to lose money. He also called Greenspan a "classic con
man" who, through political savvy, "flattered and
bullshitted his way up the Matterhorn of American power
and...jacked himself off to the attention of Wall Street
for 20 consecutive years".
Ben Bernanke (Wiki)
- The Great Moderation (Wiki)
aided by the Taylor Principle (Wiki)
- The pronouncement of a new stability caused instability.
Employer of last resort (Wiki)
- the government offers jobs to anyone who wants one
On Taxes (goal is to drive the money, change behavior and
be progressive):
Duping Dopes will not work - BitCoin will not succeed
since that's their model
Taxing work is bad idea (Wiki: Payroll
Tax, FICA)
- regressive, discourages work, discourages employing
people, favors moving jobs outside America, favors
replacing people with robots
Taxing corporations is a bad tax: drives them out of
America, encourages cutting deals
The Income tax: he's neutral
Likes taxing bads: alcohol, tobacco, pollution, financial
transactions,
A Hut tax based on cubic feet of your house (eco
friendly).
Inheritance tax to stop family fortunes he likes.
Movie: Boom Bust Boom (IMDB,
Netflix, Trailer)
- Randall Wray is one of the people interviewed & and
some attention to Hyman Minsky (Wiki).
Levy Institute
The War On Poverty after 40 years, A
Minskyuan Assessment, No. 78, 2004 (pdf)
- "the real flaw in the WOP was that it lacked
job-creation initiatives of the type developed by
President Roosevelt during the Great
Depression."..."Instead of providing the impoverished with
an opportunity to work, it provided them with the
opportunity to learn how to work."...“policy weapons which
are sufficient to move an economy from slack to full
employment are not sufficient to sustain full employment”
...
"Minsky’s fundamental argument is simple:
(1) poverty is largely an employment problem;
(2) tight full employment improves income at the bottom of
the wage spectrum; and
(3) a program of direct job creation is necessary to
sustain tight full employment. Thus, he argued that a
program of direct job creation was “a necessary ingredient
of any war against poverty” (Minsky 1965, p. 175).
As Minsky put it: “The New Deal, with its WPA, NYA, and
CCC, took workers as they were and generated jobs for
them....The resurrection of WPA and allied projects should
be a major weapon of the War on Poverty” (1965, p. 195). Improving Governance of the Government Safety Net
in Financial Crisis, 2012(pdf)
-
Chapter 2. Summary of the Causes of the Global
Financial Crisis: A Minskyan View -
“I think there is an element of
truth in the view that the superstition that the
budget must be balanced at all times [is necessary].
Once it is debunked [that] takes away one of the
bulwarks that every society must have against
expenditure out of control. There must be discipline
in the allocation of resources or you will have
anarchistic chaos and inefficiency. And one of the
functions of old fashioned religion was to scare
people by sometimes what might be regarded as myths
into behaving in a way that the long-run civilized
life requires. We have taken away a belief in the
intrinsic necessity of balancing the budget if not in
every year, [then] in every short period of time. If
Prime Minister Gladstone came back to life he would
say “uh, oh what you have done” and James Buchanan
argues in those terms. I have to say that I see merit
in that view.”
In other words, the need to
balance the budget over some time period determined by
the movements of celestial objects, or over the course
of a business cycle is a myth, an old-fashioned
religion. But that superstition is seen as necessary
because if everyone realizes that government is not
actually constrained by the necessity of balanced
budgets, then it might spend “out of control”, taking
too large a percent of the nation’s resources.
Samuelson sees merit in that view. Ref.: PAUL
SAMUELSON ON DEFICIT MYTHS by L. Randall Wray)
Six Myths that Hold
Back America: And What America Can Learn from the Growth
of China's Economy 2011 by Frank Newman - on order
Freedom from
National Debt– May 2, 2013 by Frank
Newman - on order
Vimeo
(2012, Suny
Global Center): “Six Myths That Hold
Back America- and What America Can Learn From the Growth
of China’s Economy” - (1:20:26) Frank Newman (Title
is book title) The six myths:
1. Asian nations are bankrolling the U.S.
2. Treasuries "crowd out" financing for the private sector.
3. If everyone tries to save more, the nation will save
more, and Investment, GDP, and employment will increase.
4. If the deficit is reduced, then national Saving and
Investment will increase.
5. Deficits create great burdens of repayment and taxes for
our children.
6. If the U.S. does not get its fiscal deficit reduced soon,
U.S. Treasuries will face the same problems as bonds of
Greece and Ireland.
The Observer Aug 31,
1997:
Curried Emu - the meal that fails to nourish
by Wynne Goodley -
London Review: Maastricht
and All That Oct 1992 by Wynne Godley - "The
central idea of the Maastricht Treaty (1991 Wiki)
is that the EC countries should move towards an economic
and monetary union, with a single currency managed by an
independent central bank. But how is the rest of economic
policy to be run?" Sectoral balances (Wiki)
simplified version: [Public/Government] + [Private] +
[Foreign] = 0
This means when the US government runs a deficit then there
is a surplus in the private and foreign sectors.
"According to the sectoral balances approach, austerity can be counterproductive
in a downturn due to a significant private-sector financial
surplus, in which consumer savings is not fully invested by
businesses."
Super
Imperialism: The Economic Strategy of American Empire
by Michael Hudson
1972 - may be the first book to describe American Dollar
Hegemony (Wiki: Dollar
hegemony)
Killing the Host: How
Financial Parasites and Debt Bondage Destroy the Global
Economy by Michael Hudson (Wiki:
)2015 - looks very interesting
The
Monster: How a Gang of Predatory Lenders and Wall
Street Bankers Fleeced America--and Spawned a Global
Crisis
Episode
#91.2 // Michael Hudson on Killing the Host - 1 hour
audio interview based on the book Government
Debt and Deficits Are Not the Problem. Private Debt Is.
- 2013 paper The
Economic Crisis & Crisis Theory II 2014 -
includes a video Alan
Freeman Consumption, Profit and Finance: why can't the
left get it right? (0:00 to 21:45), Andrew Kliman Were
Corporations--or Corporate Executives--Really Hogging a
Bigger Share of the Income Workers Produce? No. (23:00 to
45:35), Michael Hudson The New Austerity: Feeding the FIRE
sector overhead (46:45 to 1:50:00), Q&A (1:50:30 to
end)
Banks through out history, even when Marx was writing,
only lent money to already existing products, not to
industry or business. Michael
Hudson, Financial Parasites, Left Forum 2014
Excerpts- Parasite different than Vampire Squid - an
excellent 30 minute explanation of his idea Michael
Hudson: Money & Debt 2012 - historical overview
and how canceling debts makes sense. MMT vs. Austrian
School Debate 2013 - Warren Mosler (Wiki,
Amazon, home page)
for MMT (Wiki)
- The Austrian ideas work with fixed exchange rates, but
not when rates float, so after 1971 no longer works.
In today's floating rate world MMT describes how things
work.
There's a problem with merging the central bank
into Treasury in that the treasury is controlled by
politicians and without a well functioning government
(which we don't have in the US) there will be runaway
spending.
"Never let the facts get in the way of a good
story is a well-known proverb. However, the story of
the financially constrained government, rooted in
metallism, is particularly debilitating for democratic
politics. The deconsolidated government accounting
convention is an institutional habit, which could be
abandoned with no material effect to the economy,
according to this analysis. However, it would remove the
psychological effect on the public of having a government
account that seemingly could reach zero if market
confidence or taxes deteriorate. This psychological
feature and misreading of the financial system galvanises
politicians to implement otherwise unpopular and imprudent
macroeconomic policies. A paradigm shift to functional
finance may revitalise the post-democracies ridden with
various legitimacy crises by encouraging citizens to
deliberate over the state’s public purpose rather than
taking a backseat to technocrats who claim to safeguard
future welfare by ‘balancing the books’. Government
spending should be constrained indeed, but by budgeting,
accounting and democratic politics."
There are 3 separate issues regarding ability to
provide SS/Medicare in future years--financial ability to
pay, legal authority to pay, & productive capacity to
provide increasing standard of living to future workers
& non-workers. Unfortunately, these 3 separate issues
are not kept separate in public discourse by journalists,
policy makers, SS/Medicare trustees, and even economists.
First, though, let's understand that the SS/Medicare trust
funds are about the LEGAL authority to provide benefits.
They are not about FINANCIAL ability to provide benefits .
. .. In the future, when/if the payroll tax does not cover
legal authority to pay all benefits & SS/Medicare
"cash in" the bonds owned by trust funds, govt will get
legal authority to pay benefits via general revenues or
selling securities (deficit). But this is exactly
what govt would do WITHOUT trust funds--get legal
authority to pay benefits beyond payroll tax revenues
either from general revenues or selling securities
(deficit). Because govt does same thing w/ or w/o
trust funds, trust funds do not provide FINANCIAL ability
to pay, only LEGAL ability. But just as sufficient
balances in trust funds provides no FINANCIAL ability to
pay shortfall is not a legit argument against FINANCIAL
ability to pay. FINANCIAL ability to provide future
benefits is NEVER in question for a monetary sovereign.
FINANCIAL ability to pay is a POLICY CHOICE, not a
constraint. Greenspan explains this here very clearly in
the first 18 seconds https://youtu.be/m6MGX1AKFm4
LEGAL authority to pay is also a POLICY CHOICE, not a
constraint. For example, Govt could pass law giving trust
funds 100% interest/year (remember, trust funds aren't
about FINANCE, so not a problem FINANCIALLY), which would
provide LEGAL authority to pay SS/Medicare FOREVER.
Another example of providing LEGAL authority to pay future
benefits is to pass a law saying govt will pay full
benefits. @StephanieKelton
explains here that we already do this in some cases.
FINANCIAL ability to pay and LEGAL authority to pay future
benefits are POLICY CHOICES. They are UNCONSTRAINED by
anything other than policy makers simply writing a law
saying the benefits will be paid. Anyone who says
otherwise is muddling the 3 separate issues.
However, ability to provide future standards of living to
retirees and rest of population w/o cutting benefits IS a
constraint. If you just run deficits to pay benefits in
future, if productive capacity is insufficient you will
get inflation, not more real goods/services.
Greenspan again (B.C. tries to) explains this clearly here
starting at 45 seconds in
https://youtu.be/m6MGX1AKFm4?t=45s
Lastly, some are talking about Fed simply transferring its
govt bonds to trust funds as way to ensure future
entitlements. This is simply a transfer of assets from one
agency of govt to another, and shows clearly that LEGAL
authority to pay is always a POLICY CHOICE ...BUT, Fed
transfer of its securities does not work under current law
because to debit Fed assets you have to debit Fed capital
(equity). Fed is legally required to send its retained
earnings to Tsy, so they are part of govt budget position
. . .So, if Fed transfers its securities and debits its
capital, under current law, this would increase current
and future govt deficits by same amount until Fed's
capital was built back up. Of course, yet again, you
could simply change the law and do some creative
accounting on Fed's balance sheet for this debit of assets
and capital. So, again, LEGAL authority to pay is a POLICY
CHOICE.
In sum, always remember that govt ability to LEGAL
authority and FINANCIAL ability to pay benefits are NOT
CONSTRAINTS, they are CHOICES, just like govt chooses to
pay for wars, cut corporate taxes, etc., all the time. It
can ALWAYS choose to authorize and pay SS/Medicare.
The only actual hard constraint on future entitlements is
PRODUCTIVE CAPACITY to pay these benefits and maintain
standards of living for others at same time.
Thus it is NOT useful for informed policy debates to have
CBO & SS/Medicare trustees to forecast "solvency" of
trust funds in the manner they do now. However, it
WOULD BE useful for them to say "our analysis shows govt
has CHOSEN not to legally fund these programs in full
after 20XX; if it CHOOSES to do so w/o taxes/spending
cuts, given assumptions in our econ model we forecast
inflation to be X%."
Karl
Popper says one of the tests of a theory is how well
it can make predictions.
"Thus, it is the entire collection of ideas that has
enabled us to make meaningful sense of events in domestic
and global markets. For example, our framework has helped
us to understand:
the dynamics of debt default under fixed exchange
rates (e.g. the Russian case),
why the CBO’s projection of "surpluses as far as the
eye can see" (Clinton years) was destined to miss the
mark,
why the Stability & Growth Pact would not
restrict government deficits,
how default risk premiums would lead to a debt
crisis in the Eurozone,
why Quantitative Easing would not cause runaway
inflationary,
why the sharp increase in the US deficit would not
cause US interest rates to rise,
why the Fed’s zero interest rate policy (ZIRP) would
fail to restore a private credit expansion, etc., etc.
YouTube: Stephanie
Kelton -The Angry Birds Approach to Understanding
Deficits in the Modern Economy- 2014 - video
clips saying the national debt is a problem (including Cenk
and Bernie).
"Capitalism Runs on Sales - Spending creates Income - income
creates sales - sales create jobs"
Republicans say, We have a spending problem!"; Democrats say,
"We have a revenue problem!" - both lead to fewer jobs
Calming Fact: "As the sole manufacturer of dollars, whose debt
is denominated in dollars, the U.S. government cannever become
insolvent, i.e. unable to pay its bills. In this sense,
the government is not dependent of credit markets to remain
operational. Moreover, there will always be a market for
U.S. government debt at home because the U.S. government has
the only means of creating risk-free dollar-denominated
assets." St. Louis Federal Reserve.
"[A] government cannot become insolvent with respect to
obligations in its own currency. A fiat money system,
like the ones we have today, can produce such claims without
limit". Alan Greenspan 1997 congressional testimony
(50:33)
"Every single time that the federal government's deficit gets
too small, which here gets to be below it's average of 3.1%,
we've had a recession. Every single time."
"Currently, banks are allowed to have accounts with the
Federal Reserve that come with a lot of privileges:
higher interest rates, instant clearing, and the
security provided by being nondefaultable. Authors
Morgan Ricks, John Crawford, and Lev Menand argue for
ending these exclusive privileges by offering
“FedAccounts” to everyone. FedAccounts would be a public
option for the unbanked and underbanked while also
providing substantial benefits to businesses and our
economy as a whole.
FedAccounts would provide the following features to all
Americans, as well as American businesses: no fees or
minimum balances; the same interest rate that commercial
banks get; and no interchange fees for debit card
payments. Also, payments between FedAccounts would clear
in real time, and there would be no need for federal
deposit insurance, as FedAccount balances would be
sovereign and nondefaultable. The lack of fees and
minimum balances would remove obstacles that exclude
millions of Americans from our financial system, and the
perks of central banking would greatly increase the cost
and efficiency of transactions for businesses.
This report details the FedAccounts proposal and its
benefits. It also discusses the merits of FedAccounts
over other reform proposals like narrow banking, postal
banking, and cryptocurrencies."
Debunking
Economics: The Naked Emperor of the Social Sciences by
Steve Keen, 2001 - Talks about the problem with the EMU
before it happened. Dec 2016, reading. Highly
recommended. For more on this book see below.
Has a few areas that interest me.
1. new thinking about how the economy works, for example
including energy in addition to labor and capital: "a worker
without energy is a corpse, a machine without power is a
sculpture". Also the importance of private sector debt
in relation to growth and GDP.
2. In college (San Jose State)
Louis O. Kelso was promoting Two-Factor Theory: The
Economics of Reality where the example I remember was
two house moving companies. One based on the use of a
horse and buggy, the other on the use of a modern moving
van. At the end of a year's operation the two questions
are: Who worked harder (ans. the horse and buggy company), and
Who made more money (ans. the moving van company).
Kelso attributed the higher income of the moving van company
to the higher amount of capital used to acquire the moving
van. But . . . Keen probably would say another
difference was the the use of energy. i.e. One
horsepower (literally) vs. maybe 500 horsepower.
Thinking about this example a year or two ago I saw the idea
that energy impacts not only a business, but also our day to
day life, since there are many motors in pretty much every
house. 746 Watts of electricity is equivalent to one
horsepower. A trained cyclist can produce about 400
Watts. So each 400 Watts of electricity consumed for an
hour is about the same as having a servant working for that
hour.
3. modeling using the "Minsky" software. But this
appears to me like a first grader working with SPICE (Wiki, example)
modeling that's very basic and he makes no validation to real
world data.
Note that when tube based electronics were at
their peak there were no computers or SPICE modeling and so
plots and equations were used to analyze tube circuits.
Early on the grid was treated as independent from the other
electrodes, then Miller (Wiki)
saw that there was capacitance between the grid and plate
which explained tube operation much better than the old
way. The feeling I get watching the "Minsky" related
videos is that they are far from discovering the economic
equivalent to the Miller effect and so the models today do not
have much value, maybe in a few decades they will.
"Now that economists have explained the persistence of the
ZLB, they can now turn their
attention to understanding its perverse effects. The real
problem of the ZLB for economists
has been that it inverts the status and behavior of all
other sub-economic particles. In particular:
Growth, which was high, is now
low;
Inflation, which was bad &
everywhere, is now good & nowhere;
CBs (“Central Banks”) which
prevent inflation, now try to cause it; and
HMDs (“Helicopter Money
Drops”) which were mad, are now sane
These inversions are causing real problems for economists,
who find themselves arguing for policies they used to
oppose. Professor Summers hopes that knowledge of the
existence of the FERIR will make
it easier for economists to argue that night is day and
rainbows are grey, as they provide policy advice in these
troubled times."
CERN:
Crazy Economic Rationalizations for
aNomalies (Paradoy) FERIR: Full Employment Real Interest Rate
(Paradoy) GFC: Global Financial Crisis (Wiki)
MMT says caused by high debt which in turn was caused
by Clinton budget surplus (sucked much needed money
out of private sector) Growth: Economic (Wiki)
MMT says "trickle down" (Wiki)
does not work, but "bubble up" does work. HMD: Helicopter Money Drops (Wiki) Inflation: (Wiki)
MMT says caused by government competing with private
sector NAIRU: Non-Accelerating Inflation Rate of
Unemployment (Wiki)
- MMT says false concept ZLB: Zero Lower Bound (Wiki)
Debunking Economics: The
Naked Emperor of the Social Sciences by Steve Keen,
2001 - Talks about the problem with the EMU before it
happened. Dec 2016, reading. Highly recommended.
This book shows that microeconomics (Wiki)
is based on a number of false beliefs. The first few
chapters are devoted to supply and demand curves and the
numerous false underlying assumptions.
For example that a factory making a commodity will first
improve it's profitability after hiring more workers will
increase, but at some point hiring more workers will
decrease profitability.
The book does not mention that there are very few
commodities being manufactured anymore. I've heard a
rumor that there is a local hardware store that sells nails
from a bin. The hardware stores near me all sell nails
packaged in boxes with brand labels. Propane is a
commodity, but is delivered in trucks from different
suppliers and there is a huge difference in the price
depending on the supplier so, at least here, propane is not
a commodity.
This book debunks microeconomics.
The book: Zombie Economics:
How Dead Ideas Still Walk among Us, May 6, 2012, by John Quiggin debunks some key ideas of
macroeconomics. Highly recommended.
I'm adding Nate just below Steve Keen because he
is a big supporter of the idea that energy is THE key driver of the economy.
IN this video Nate joins Steve Keen in pointing out problems
with classical economic ideas. The
10 Core Myths Still Taught in Business Schools | Frankly 99,
43:22 -
00:00 -
Introduction
02:33 - Price
= Value
05:48 - Humans
are Rational
08:29 - Supply
Curves Slope Upward
11:38 - Energy
is Just Another Input
19:28 - Money
Comes from Savings
22:40 - Debt
is a Neutral Tool
27:14 - GDP is
the Measure of Progress
31:25 - Nature
is a Subset of the Economy
34:16 -
Markets Produce the Best Outcomes
36:49 -
Economic Laws are Universal and Timeless
39:53 - Closing
Thoughts
Father of Functional Finance (Wiki).
See the paper Functional Finance and Full Employment: Lessons
from Lerner for Today, 1999 (above)
The following copied from Wiki:
The principal ideas behind functional finance can be
summarized as:[1]
Governments have to intervene in the national and global
economy; they are not self-regulating.
The principal economic objective of the state should be
to ensure a prosperous economy.
Money is a creature of the state; it has to be managed.
Fiscal policy should be
directed in light of its impact on the economy, and the
budget should be managed accordingly, that is, 'balancing
revenue and spending' is not important; prosperity is
important.
The amount and pace of government spending
should be set in light of the desired level of activity,
and taxes should be levied for their economic impact,
rather than to raise revenue.
Principles of 'sound finance' apply to individuals. They
make sense for individuals, households, businesses, and
non-sovereign governments (such as cities and individual
US states) but do not apply to the governments of sovereign
states, capable of issuing money.
Zombie Economics: How Dead Ideas Still Walk Among Us,
2010 - Points out logical fallacies and examples where the
idea is shown to fail in a big way, yet it is still
believed. Debunks key macroeconomic ideas. Debunking
Economics: The Naked Emperor of the Social Sciences
by Steve
Keen, 2001 - Debunks the core ideas in
microeconomics.
A chapter is devoted to each of these:
the Great Moderation (Wiki)
- Wiki has a paragraph "Possible_end" indicating the
zombie nature of the idea
Efficient Markets Hypothesis (EMH)(Wiki)
- Wiki has a paragraphs titled: Criticism and
behavioral finance, Economic
bubbles and irrational exuberance, Behavioral
psychology, View
of some economists (mentioned Quiggin, citing
Bitcoin as a pure bubble), Late
2000s financial crisis where they all are critical of
the idea, but the top paragraph presents the idea as
valid.
"Since Bitcoins do not generate any actual
earnings, they must appreciate in value to ensure that
people are willing to hold them. But an endless
appreciation, with no flow of earnings or liquidation
value, is precisely the kind of bubble the EMH says
can’t happen."
Dynamic Stochastic General Equilibrium (Wiki)
- Wiki has a paragraph titled: Controversy
- but it's framed as a debate so still a zombie.
Trickle-down economics (Wiki)
- If you read the Criticisms paragraph there is no
question that this is a dead idea, yet the introductory
paragraph calls it a political term and links to
Trickle-down effect (Wiki)
talking about fashion (also see: Recession
Economics, 1982 by John Kenneth Galbraith "Oats
& Sparrows theory".
In 1890 the term was "horse and sparrow theory" - 'If you
feed the horse enough oats, some will pass through to the
road for the sparrows.'.
Privatization (Wiki)
- A sub-paragraph of "Opinion" is Opposition,
but the overall view of Wiki is that the idea is still
debatable, so a zombie. Quiggin says there are a few
cases where it makes sense, for example GM was privatized
after being taken over, but the notable failures are:
RailTrack in the UK, London Underground, Natioinal
Broadband Network in Australia, Edison Schools in
the US, Crown Health Enterprises in New Zealand, police,
prisons & mercenary military forces (Wiki).
The 2017 US Dept of Education head supports privatization
of the public schools.
Getting-Back-Full-Employment: A Better Bargain for
Working People, 2013 - debunks NAIRU, False
Profits: Recovering from the Bubble Economy, 2010 -
they are: Alan Greenspan, Ben Bernanke, Social
Security: The Phony Crisis, 1999 - Ironically, the
only real threat to Social Security comes not from any
fiscal or demographic constraints but from the political
assaults on the program by would-be "reformers". The
United States Since 1980, 2007 Plunder
and Blunder: The Rise and Fall of the Bubble Economy,
2009, 2010 (Written Oct 2008)- Ch 2 The Clinton Era and
the Origins of the Stock Bubble, Ch4 The Beginning of the
Housing Bubble (In the late 1990s.."But in most areas
around the country at that time, there was a close
relationship between the cost of renting and owning
comparable units",
Predicted the
Global Financial Crisis Book: The Coming First World Debt
Crisis, 2006 (Amazon)
Started reading: She mentions
the UK "Competition and Credit Control" in
Sept 1971 as a turning point rather than "Nixon
Shock". I wonder if they are related?
She agrees with Michael Hudson
that bankers need to be removed from their current
parasitic position and go back to serving the
productive economy. That's to say that making
money using money is not productive.
As of 2017 it appears that we are still in a bubble
economy where prices are inflated by the very low
interest rates. But raising rates will burst the
bubble.
See Effect of Interest Rates on
Home Values
YouTube: Apr 26, 2019 Economist Ann Pettifor: "GDP
isn't the Problem, Capitalism is!", 12:46 - National
self sufficiency is requires, shipping food between
countries (except for small countries where regional trade
is needed) is not sustainable.
YouTube: Ann Pettifor - How
Society Can Break The Despotic Power of Finance - Warwick
Economics Summit 2014 - If an airplane crashes because
of how it's designed it would be an outrage to blame the
crash on human error, but in the case of the recent
financial crisis, economists blamed it on human error
(greed) rather than on their policies. Hyack, Friedman
& Eugene Fama (2013 Nobel prize winner) are to
blame. Savings are not needed to fund
investment. There is no such thing as Fractional
Reserve Banking since 1694. Commercial banks do NOT
lend the deposits of savers, they do not need deposits in
order to lend. BitCoin is based on mistrust Ponzi).
YouTube: TEDxUtrechtUniversity
- Ann Pettifor - Decarbonising the economy: How we can
finance it. - How banking really works, credit
is not subject to the laws of supply and demand, Limits on
money creation:
too much credit->Inflation, not enough
credit->unemployment & deflation, credit at interest
rates too high to pay back-> defaults, ecological cost to
to much credit
She says the Fed deregulated credit in 1971 causing
inflation. Household consumption rises dramatically
starting in 1971 because of credit cards.
Need turn banks from being masters of the economy to
servants of the economy.
Although she uses the year 1971 in many places, "Nixon Shock"
is not mentioned, but rather the UK the adoption of
"Competition and Credit Control" in Sept 1971 (Wiki)
which used reserve asset ratios (a false concept according
to MMT) instead
of lending ceilings.
Ann Pettifor InterviewFeb 17, 2018
(13:34) - Prime Economics: On tectonic plates, the
economic system & the economics profession25 April 2018 - "But while the
theory is faithfully taught, and policies implemented, the
economics profession collectively still fails to understand the
operation of the system – or so it seems to both
outsiders and insiders. The economics profession, it would
seem, has reached the stage the geology profession reached
fifty years ago – before the discovery of tectonic plates." .
. ."... society demands to know why economists have not
“discovered how the economy really works”
He is NOT a proponent of MMT, but favors austerity.
That's to say he does not see the need for sovereign
governments to directly create jobs. In my opinion, his
proposal to train displaced workers will only allow the more
trained workes to displace a less trained worker, i.e. it will
not create a new job. It's also not clear if he made the
prediction or if it was someone on his staff.
None of these people mention MMT, but some of them are
using ideas that are a fundamental part of MMT and are not
part of historical schools of economics.
Jakob Madsen (Wiki,
)& Jens Kjaer Sørensen (Denmark) - When
doomsday economist was right - "The
macroeconomic reality is generally difficult
to be explained within the dominant
neoclassical equilibrium model."
see: Zombie Economics
Nouriel Roubini (Wiki)
- does not understand MMT and so have made what
I (BC) feel are predictions that will fail
Peter Schiff (Wiki)
- he does not understand MMT and has policies
that are counter to MMT
Robert Shiller (Wiki) - preface to 3 editions
of his book Irrational Exuberance offer
predictions of bubble - not so much MMT
Bezemer applied
four selection criteria.
Some account on how they arrived at their
conclusions.
Including an analytical account linking a real
estate crisis to real-sector recessionary
implications (eliminating John Talbott).
Prediction in the public domain, and
The prediction had to have some timing
attached to it (eliminating Raghuram Rajan and
Claudio Borio)
It seems strange that Ann Pettifor is not on
that list. Why?
Other MMT References
American Affairs
Jan 1946 V VIII, No. 1 - Taxes for Revenue Are
Obsolete (pdf),
Beardsley Ruml, Chairman of the Federal Reserve Bank
of New York - The experience of W.W.II showed
that the U.S. could pay for the war without raising
the needed revenue from taxes.
"Taxation is one of the limitations placed
by government on the power of business to do what it
pleases. There is nothing reprehensible about
this procedure. The business that is taxes is
not a creature of flesh and blood , it is not a
citizen."
"The necessity for a government to tax in order to
maintain both its independence and its solvency is
true for state and local governments, but it is not
true for a national government. Two changes of
the greatest consequence have occurred in the last
twenty -five years (since 1921) which have
substantially altered the position of the national
state with respect to the financing of its current
requirements. The first of these changes is
the gaining of vast new experience in the management
of central banks. The second change is the
elimination, for domestic purposes, of the
convertibility of the currency into gold."
Purposes of taxation:
1. instrument of fiscal policy, i.e. price stability
(goal: stable purchasing power)
2. public policy, i.e. progressive income and estate
taxes (goal: wealth & income equality)
3. public policy, i.e. subsidizing or penalizing
industries or economic groups
4. isolate and asses directly the costs of certain
national benefits, such as highways ande social
security
Taxing corporations is a Bad Tax.
Journal of Finance Aug 1946: Tax policies for
Prosperity (pdf)
by Beardsley Ruml - behind a pay wall
"Briefly the idea behind out tax policy
should be this: that our taxes should be high
enough to protect the stability of our currency, and
no higher...Now it follows from this principle that
our tax rates can and should be lowered to the point
where the federal budget will be balanced at what we
would consider a satisfactory level of high
employment."
Since countries differ in their export/import
balance the above gets modified by MMT to be:
(from the MMT primer by Wray) "Tax rates should be
set so that the government's budgetary outcome
(whether in deficit, balanced, or in surplus) is
consistent with full employment.
Levy Economics Institute - MM
Papers - Working paper 778 Modern Money Theory
101: A Reply to Critics 2013 (free
pdf)
High Powered Money (Wiki)
is mentioned in the paper and I didn't recognize the term
and the Wiki page was less than helpful. Warren
Mosler has this to say:
"That's just cash plus dollars held by member banks in the
reserve accounts at the Fed. It was called high
powered money because it was convertible into gold before
1934. Randy (Wray) still uses it because his
professor's initials were HPM (Hyman P. Minsky)."
Regarding the large upturn in HPM since 2007 (Wiki
plot) L. Randall Wray says:
In any case what happened was that the Fed got confused and thought that QE would stimulate something. Exactly what, we do not know.
Fed also started paying interest on reserves--which makes them equivalent to bills. So think of the $4T of reserves as bills paying low interest.
That was the kink in the curve you saw. You could just as well exchange the reserves for bills and then the kink goes away.
email sent to Dan Kedmey 7/20/2016 about a TED ideas article
related to Yanis and a Time magazine article about the
possible US default and China.
Hi Dan Kedmey::
I saw your article http://ideas.ted.com/what-should-the-future-of-capitalism-look-like/
And want to point out that Yanis describes what
happened to the economy after 1971 as "The Global
Minotaur". He is a very charismatic
speaker and so I read his book, then a book on
Volcker including communicating with the author and
can not find any plan by Volcker for American
hegemony. My research into The Global Minotaur
is at:
http://www.end2partygovernment.com/2012Issues.html#Global_Minotaur
I then discovered Modern Monetary Theory (MMT) which
offers a good explanation of what happened after
1971. I believe that Yanis used Greek
mythology because he didn't really understand what
happened.
For me the fact that MMT predicted the problems with
the Euro in exactly the way they have happened and
also predicted the Global Financial Crisis (one of
the key factors was the problem created by the
Clinton budget surplus) makes me a believer in
MMT. Here's some research on MMT you may want
to study:
http://www.end2partygovernment.com/2012Issues.html#MMT
Please let me know you received this.
PS Most thinking on the economy is based on how it
worked up until 1971. So there's about 4,000
years of thought than no longer is applicable.
This may explain why so many people keep thinking
the old way. If you don't know how
something works it pretty much impossible to predict
it's behavior or make make "improvements" to it's
operation.
Have Fun,
Brooke Clarke
brooke@..........
Andrew Flowers
Not an MMT person but wrote an extensive article
examining what might be called a bubble up economy.
Rent = House price x
(interest rate +
depreciation rate) So, house
prices depend on equivalent rent rates as well as
mortgage interest and depreciation.
[2017 - This paragraph added after I started reading the
2006 (pre Crisis) book The Coming First World Debt
Crisis]
A home buyer approaches the housing market and the first
calculation is "What can I afford". This is
determined by what monthly payment they can make based on
the type of loan and downpayment.
Here is an example of the effect of the interest rate on
affordability.
Payments do not include title, morrgatge insurance, taxes
or property insurance, maintance, just principle and
interest.
Rather than run the calculation for the loan amount it's
being run assuming $1,000/month is available to buy a
house, i.e. what can you afford.
APR
%
Loan Amount
$
Total $
Principal
Total $
Interest
Interest/Loan
10
113,951
360,000
246050
2.15
8
136,283
360,000
223717
1.64
6
166,792
360,000
193208
1.16
4
209,461
360,000
150539
0.72
2
270,549
360,000
89451
0.33
One way to view getting a lower rate loan is to allow you
to buy a more expensive house. But when the mortgage is
bought by investment banks in order to "financialize" it
the low interest rate does not go to getting a "better"
house but rather only goes to make the price of the house
higher. This can easily be seen by considering what
a change of interest rate has on the price of a home you
can afford. For example a house that sold some years
ago for $166,792 with a 6% loan, sells today for $209549
with a 4% loan (all other variables constant), so there's
an increase in the price of the house of 26% soley because
of the lower interest rate.
This same effect applies to anything were borrowed money
is involved, such as the stock market. This was
origionally named the Greenspan Put (Wiki),
but was renamed the Bernanke Put in 2007 and today might
be called the Yellen Put since there has been no change in
keeping the interest rates very low to promote higher
capital asset "values". Low interest rates support
various "bubbles" (Wiki)
(but do not cause them).
In the above table note the ratio of Interest/Loan.
I see a problem here relating to the lack of money to pay
off the loan. Note when you borrow money the bank
only loans you the principle amount. For example if
you borrow $166,792 from the bank they "print money" in
that they just make bookkeeping entries, one in your
checking account and one in their asset account for the
same $166,792 amout. But the bank expects you to pay
back $360,000 over the life of the loan. The bank is
creating new money in this process. They are NOT
loaning you money that someone has deposited in their
bank.
As of 2017 there are only two places the money
used to pay the interest can come from. Either
someone else has to go bankrupt or the Federal
government has to supply that money. Note that the
amount of interest is about the same as the loan amount
for a 30 year fixed mortgate near 5% so is a
considerable amount of money. As of 2021 better
way to look at this is the federal deficit/debt puts new
money into the economy.
If the economy has inflation then as the mortgate
advances in years the money used to pay it back is
inflated, making the true interest rate lower than the
number shown on the loan documents. But if there's
deflation then the effective loan rate increases causing a
deflationary spiral (Wiki).
Deflation is avoided as a matter of policy. If
allowed people would no longer borrow money, limiting it's
supply.
Wiki has three definitions for "Gold Standard": specie
(money is only gold coins), bullion (government will
sell gold bars at fixed price), exchange (paper
money in one country can be exchanged with paper money in
another country at fixed rate).
Before and for some years after the Declaration of
Independence and Constitution the US colonies (Wiki)
used British Pounds (Wiki)
as well as Spanish dollars (Wiki).
"By far the leading specie coin circulating in
America was the Spanish silver dollar, defined as consisting
of 387 grains of pure silver. The dollar was divided into
"pieces of eight," or "bits," each consisting of one-eighth of
a dollar. Spanish dollars came into the North American
colonies through lucrative trade with the West Indies. The
Spanish silver dollar had been the world's outstanding coin
since the early 16th century, and was spread partially by dint
of the vast silver output of the Spanish colonies in Latin
America. More important, however, was that the Spanish dollar,
from the 16th to the 19th century, was relatively the most
stable and least debased coin in the Western world"
Coinage Act of 1792 (Wiki)
- An act establishing a mint, and regulating the Coins of the
United States. The coins contained either gold ($10, $5,
$2.50) silver ($1, 50¢, 25¢, 10¢, 5¢) or copper (1¢, half¢) of
a specified purity and weight (Wiki).
There were a number of following Coinage acts, but this one
tied gold and silver to money. Note there was no
provision for paper money and the US silver dollar was to have
a value the same as the Spanish silver dollar.
Ratio of the price of Gold to Silver
Greenbacks
1862 to 1971: "This Note is Legal
Tender for All Debts Public and Private Except
Duties On Imports And Interest On The Public Debt; And
Is Redeemable In Payment Of All Loans Made To The
United States."
ended silver in the dime
and quarter
$20.67 / 16 = $1.29 Oz of silver
so silver quarters were worth 34.5 cents.
Executive order 6102 (Wiki,
Text)
(March 9, 1933) required everyone to turn in all gold coin, gold bullion, and gold
certificates in excess of $100 per person (at $20.67 per
ounce, the then going rate) to a Federal Reserve Bank on or
before May 1, 1933. This was done using registered
mail where special locks were used on the
mail bags, not to stop theft, but as tamper indicators.
The Gold Reserve Act of 1934 (Wiki)
Took the US off the specie gold standard and
fixed the price of gold at $35/oz. "...outlawed most
private possession of gold. The act also changed the
nominal price of gold from $20.67 (price paid to people
turning in gold) per troy ounce to $35 (the dollar is pegged
to gold, not floating). This price change incentivized
foreign investors to export their gold to the United States,
while simultaneously devaluing the U.S. dollar in an attempt
to spark inflation. The increase in gold reserves due to the
price change as well as the confiscation clause resulted in
a large accumulation of gold in the Federal Reserve and U.S.
Treasury. The increase in the money supply lowered real
interest rates which increased investment in durable
goods." This removed the "gold standard" and left the
value of gold at $35 per ounce which was maintained until
the Nixon
Shock of 1971.
For about 200 years (1792 to 1971) U.S. currency was tied
to gold and/or silver. Before 1971 the folding money
in my wallet said Silver Certificate (Wiki)
on the front (see photo above). I could take it
to the mint in San Fransisco (or any other US Mint) and get
either silver dollars or silver ingots in exchange.
Prior to 1971 the measures of the money supply like M0, M1,
M2 &Etc (Wiki)
were important because the amount of money was limited by
the gold and/or silver reserves held by the US
government. If the government ran a large deficit
while the dollar was pegged to gold/silver there might be a
problem if everyone turned in their currency and asked for
silver. So, back then, the government needed to use
taxes to raise money in order to fund government programs
because they could not just print more money. So
governments at all levels (federal, state and local) used
taxes to raise money to fund their programs. Prior to
1971 this was the correct way to think about government
funding of programs, but not after 1971.
[side bar: in 1946 Beardsley Ruml, Chairman of the
Federal Reserve Bank of New York wrote a couple of articles
pointing out that the US had paid for W.W.II without raising
the money by taxation, see link above).]
The Federal Reserve System (Wiki)
was created by the Federal Reserve Act of 1913 (Wiki)
(Public
Law 63-43, 63rd Congress, HR 7837) section
14(a). Open Market Operations: "To deal in gold coin and
bullion at home or abroad, to make loans thereon, exchange
Federal reserve notes for gold, gold coin, or gold
certificates, and to contract for loans of gold coin or
bullion, giving therefor, when necessary, acceptable
security, including the hypothecation of United States bonds
or other securities which Federal reserve banks are
authorized to hold: (b)..." The current
version of has the same paragraph 14a. BUT. . .
in 1971 gold was decoupled from our currency so the Fed no
longer can do anything with gold (see Nixon Shock
implemented policies below).
Tax cuts to stimulate
employment must be matched by spending cuts to restrain
inflation. To check the rise in the cost of Government,
I have ordered a postponement of pay raises and a 5
percent cut in Government personnel,
a 10 percent cut in foreign
economic aid,
Investment tax credit,
a freeze on all prices and
wages throughout the United States (for 90 days?)
suspend temporarily the
convertibility of the dollar into gold or other reserve
assets (Doublespeak (Wiki):
the word "temporarily" in this case means "forever")
I remember this. The big thing
was the freeze on wages and prices. The company were I
worked (Aertech)
liked the investment tax credit. The other things like
the "temporary" suspension of convertibility of the dollar
for gold was, as Nixon said, "very technical--what does it mean for
you? " and had little impact on anyone except for Bob B. who
panned gold on his vacations and prior to 1971 was not
allowed to smelt (Wiki)
the gold dust into solid gold. Now he and everyone
else could hold gold as a metal.
I doubt that neither Nixon nor his financial advisers
understood the impact of decoupling the dollar from
gold/silver and allowing the currency to float. For
example:
Item 3 & 4 he is cutting taxes (T) and cutting spending
(G) so G and T both go down. MMT tells us that to
create jobs G-T needs to go up, so the tax cut was a good
thing but the spending cut was wrong. Note it would
have been correct with a fixed price of gold because all
levels of government needed to raise money for spending by
collecting taxes. Nixon used the pre 1971 rules for
the period after 1971 because no one understood the
implications of the change.
Note that everything about this announcement seems designed
to obfuscate its true meaning. By making the
decoupling of the dollar and gold the last of a bunch of
items and using the word "temporarily" he did about
everything possible to not draw attention to this change
that would have implications for the world and also to
discourage economists from figuring out the implications.
What's the point of doing a lot of theoretical work
when the suspension is "temporary"?
The Bretton Woods System (Wiki)
that tied the currency exchange rates of 40 countries to the
U.S. dollar which was in turn fixed to gold at $35 per
ounce. When Nixon closed the Fed's gold window it
impacted all of those 40 countries and especially the oil
producing countries represented by OPEC (Wiki).
Since Nixon shock amounted to a devaluation of the dollar
and they priced oil using $ per barrel. This dollar
devaluation and the Yom
Kippur War (Wiki)
resulted in the 1973 Oil Crisis (Wiki).
The Oil Crisis resulted in the OPEC countries holding a lot
of dollars which needed to be invested. Here is a plot
of the US government bond interest rates from 1950 to 2017:
source: tradingeconomics.com
Note with the U.S. paying high rates of interest the OPEC countries sent
the dollars back to investment banks in the U.S..
But this places a burden on the investment banks because
they needed to make money on the deposits. This
started the idea of making loans to third world
countries. As part of the Bretton Woods System (Wiki)
trade was encouraged and the only capital flows allowed
were those to clear trade balances. Global
investment capital flows were not allowed. So in
order for the investment banks to make these loans the
laws regarding global capital flows needs to be
liberalized. The people at Bretton Woods realized
that there is a conflict between global trade and global
capital flows and wanted global trade as it would improve
everyone's life while global capital flows would hurt
people. When the third world countries went into
competition with each other they ended up not being able
to pay off those high interest rate loans. The IMF (Wiki)
which was founded as part of the Bretton Woods System and
under the fixed exchange rates tied to the U.S. dollar
which was in turn tied to gold imposed austerity on these
delinquent countries, but that policy no longer was
applicable because the rules had changed in 1971.
Austerity means cutting spending which in turn hurts
economic output decreasing the money available to pay off
their loan.
Here is a plot of the U.S. Import-Export trade balance aka
Current Account (Wiki)
for the same 1950 - 2017 year range:
Note that the Import-Export balance was zero until
1971. This is because when the Bretton
Woods System was in effect there was a built-in
mechanism coupling money and trade balance. For
example if a country was a net importer, like the U.S.
prior to 1971, then we would need to export gold to
pay for those products. That causes the prices
of imports to rise slowing down the imports.
This is the capital "Recycling" that Yanis
is talking about. The problem was that by 1971
the U.S. owed France literally a boat load of gold and
Nixon was not about to give it to them. (Quora: Did
France send a ship to collect it's gold?)
From the late 1800s on schools have been teaching
economics based on a gold/silver backed dollar. Even
though that changed in 1971 they continue to teach the
outdated ideas. So even today the school economics
curriculum pretty much everywhere is still teaching the same
outdated ideas. Also micro economics is based
solely on industrial age manufacturing, i.e. before
computers and automation, and so has fundamental
problems. Macro economics is also based on false
ideas. see books above.
2017 - I've been reading about how no bankers were invited
to the Bretton Woods Conference (Wiki)
because of the damage they did in the Great Depression (Wiki).
One of the key provisions was to limit capital flows between
countries, i.e. to allow for the prevention of
Globalization. States and the Reemergence of Global Finance: From
Bretton Woods to the 1990s (Cornell Studies in
Political Economy) Hardcover – June, 1994, Eric
Helleiner (Wiki)
-
Deutsche Bank, Markets Research:Dark
matter: the hidden capital flows the drive G10 exchange
rates -
Global Finance
One of the books cited
by Ann
Pettifor, and others who predicted the Global
Financial Crisis of 2008, a number of times is "States and the Reemergence of
Global Finance: From Bretton Woods to the 1990s" by
Eric Helleiner, 1994 - Note
this was written after 1971 and before the 2007/2008 crisis,
but the author did not know about the ideas of MMT, but
nevertheless talks a lot about how the Bretton Woods
agreement spent a lot of time looking at the need for
controls on global finance while at the same time
liberalizing international trade. They recognized then
that global finance leads to destabilizing the global
economy and restricting economic options and is not
compatible with global trading which they promoted. Helleiner gives a number of reasons
why global finance was allowed while global trade is still
regulated and it boils down to controlling global finance
requires global cooperation and so can be defeated by a
single country (like the policies of the U.S.). Since
global finance does not directly effect jobs, like global
trade does, there is not much political will to restrict
it. Multinational corporations, oligarchs (Wiki)
and people involved in money laundering (Wiki)
are in favor of no global financial regulations so that they
can move money to avoid rules they do not like. Note
that money laundering is a federal crime inside the U.S. In
my opinion it is commonly practiced by IBFs (Wiki)
even though they are not supposed to. This recently
(March 2017) was in the news in relation to Russian
oligarchs making "wash transactions" in two different
markets where they purchased using Russian money and sold in
markets where the proceeds were in US$, thus moving their
money out of Russia, i.e. a global financial transaction.
Some people complain that TV and/or social media are
causing problems. But I think they miss the reason
behind that.
The FCC overturned the Fairness Doctrine (Wiki)
which was in effect between 1949 and 1987. This
required the broadcast TV news to do fair reporting. I
watched a lot of news in this time frame and pretty much
everyone in the US got the same news. Note that 1987
was the beginning of conservative talk radio.
Social media like Facebook, YouTube, Twitter, &Etc. do
not have humans making decisions on every post but rather
work with computer algorithms which are designed to do
things where the end result is more profit for their
company.
In a similar fashion what TV programs get made and get air
time is determined by what the audience wants. That's
to say by what makes them money.
In the series of books starting with Freakonomics the key
idea is that incentives can drive people do to things that
work against the betterment of society.
Adam Smith's idea of an "invisible hand" (Wiki)
has received a lot of criticism since in most cases it does
not seem to work. The above example all reinforce the
idea that there is no "invisible hand" and hence one of the
tenants of Capitalism is not valid. This means pure
Capitalism will not work.
It's May 2025 and I'm adding this paragraph after doing a lot
of study of the 2025 Iberian Peninsula blackout (Wiki,
my Learning
web page). In the process I came across these
YouTubes: Did
Renewables Cause the Blackout in Spain? with Pedro Prieto
| TGS 176, 56:32 - Energy
Blindness | Frankly #03, 24:11 by Nate Hagens, 17 June
2023. - "Labor without energy is a corpse, and technology
without energy is a sculpture." Steve Keen.
"A city without energy is a museum." Nate
Hagens @12:15
Oil really underpins the wealth of nations. If you
look at a logarithmic chart of oil consumption per country
and GDP per country, it's almost a 0.96 R squared (they are
highly correlated).
In college I learned about Two Factor Theory - there
are two ways to make money, by labor and by capital.
You can make a lot more money using capital. But Steve
Keen says energy needs to be accounted for. So,
according to him energy keeps humans alive (Labor
without energy is a corpse) and energy powers
machines/technology (technology
without energy is a sculpture).
I remember the 1981 Air traffic controllers strike (Wiki),
AFL-CIO (Wiki), UAW
(Wiki),
Jimmy Hoffa's (Wiki)
disappearance were often in the news.
Unions are a way for workers to get safe and healthy working
conditions.
The huge amount of money collected by the unions seems to lead
to organized crime on a grand scale which includes
politicians.
On the face of it unions are a way for privileged workers
(union members) to get better treatment than everyone else.
Adding this here because it was a revolutionary
change. Not only did it effect all of the shipping industry
and the lower tier businesses that support shipping, but also
how manufacturing in general works. For example Just In
Time (Wiki)
reduces a manufacturer's cost of inventory by having supplies
delivered just prior to their use. But Covid (Wiki),
Suez Canal obstruction (Wiki)
and now Trump 47 tariffs (Wiki),
have a large impact on the supply chain by disrupting the
movement of containers which causes manufacturers to shut down
production lines. Old saying: The war was lost because of the
lack of a horse shoe nail.
In 1968 and 1970 the ISO standards (Wiki)
for shipping containers were finalized. This had a
profound effect not just on how things were put on ships, but
on all aspects of material handling, things like the design of
ports, design of ships, design of trucks. For example
the port of San Francisco did not have the adjacent land
needed for container storage while the Port of Oakland did
have space for a storage yard (Wiki).
The advent of containers caused a large decrease in jobs that
occured in parallel with Nixon Shock.
Bezemer applied
four selection criteria. 
