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Posts Tagged ‘MMT’

Over the past couple of weeks the debate around platinum coin seigniorage (PCS) has been raging and that is good. In fact, it is great. Like carrot subsidies, PCS is something we should have been talking about years ago. As a rabbit American, I support both but like LetsGetItDone (LGID) who has been writing incredibly knowledgable and quite brillent posts on PCS at both The Daily Kos and the New Economic Perspectives sites, I am hoping it will be possible to leverage the current discussion into a much larger one about crating policy space.

The Power of Paper

It’s like that tired adage, give a rabbit a carrot and he eats for a day, teach a rabbit to order carrots on-line and he eats for a lifetime – or something like that. Sure, we could solve the current debt ceiling problem by minting a $1T coin but we could also chose to do more.  We could resolve the entire US debt and return our economy to full employment by minting a $60T coin.

Oh, put a sock in it each and every one of you who is sputtering something about insanity. First of all, there are some outstanding detailed explanations as to why this really will work but it all comes down to one simple thing – a fiat currency really IS a figment of our collective imagination. It IS just little pieces of paper or metal upon which we have collectively agreed to confer value and in which value is retained, in the case of the United States, by the policies of the Department of the Treasury, the Internal Revenue Service and the Federal Reserve. Beyond that, money is just paper. (Though, I have to say that in comparison to other paper, when one just happens to nibble on money, humans have a way of turning an extra special shade of white.)

Given that we know that fiat currency works, one of the things that is the most interesting about this entire debate is that no one in Congress

…or the White House

…or the Treasury

…or the Fed

has figured this whole thing out before. Part of this is because, as I have said, almost all of the people currently staffing those positions learned monetary policy at a time when the thinking was all still founded on the gold standard despite the fact that the monetary system no longer has these limits. Nixon took the country out of Bretton Woods in order to allow for growth but only a very few people managed to realize that national policy makers also needed to alter the way they thought about actual money. They needed to smash their old thinking so that the truth of the reality could become clear.

Yeah, like that happens.

I was just reading today about some complete idiot (and by “idiot” I mean conservative Republican) who is claiming that teachers teaching the distributive principle in algebra are pushing a liberal agenda. Back up the truck full of stupid. I get that once humans have their minds set on something it is hard for them to see anything else or in any other way but that won’t work for the US economy unless, of course, your objective is aligned with the GOP and your intention is to destroy the economy on “principle.” Let’s assume that since you are reading this, you are not satisfied with crashing and burning the economy and that you are willing to learn something new. Ok, now take what you think you know about debt and inflation outside and smash it against the rocks of “that’s SO ’70′s.” I can wait. (Don’t forget your jacket. It’s a bit nippy outside.)

If you still think the old “rules” of debt and inflation apply, it’s about to get a little nippy in here. Bunny teeth are sharp. I’m just sayin’.

Policy Space

For those of you who are beginning to understand the incredible power of a strong fiat currency we can now move on to what I really wanted to talk about, policy space. In speaking about policy space I am talking not about the legality of PCS and I am not talking about PCS in relationship to the debt ceiling. I am talking about why we, as progressives, should be supporting PCS for all we are worth. Progressives should be loudly supporting PCS with one voice because it would allow us, as a nation, to get past all the truly meaningless battles being fought in Washington, over shadows that live only in the backs of paranoid minds, and on to policy that could genuinely and positively effect the real world.

Let’s imagine, for instance, that we are talking about minting $60T worth of PCS coins. It could be any number but $60T is one being actively talked about so I’ll go with that for the sake of this example. (And remember, I’m not going to get into why there is no realistic way this would cause inflation or any of the other topics that have been covered by myself and LGIT as noted above.) Now, the funds made available by PCS are not pushed out immediately into the economy, as so many imagine (that really would cause inflation), rather, they are sitting in a Treasury account at the Fed. In other words, for all you MMT folk, they are a $60T entry on a spreadsheet. The first thing that happens, of course, is that all debt that falls due is paid as it is due, in full, instead of being rolled over. No more interest is paid and no new debt is created. Take that, austerians, as Paul Krugman calls those dedicated to austerity. Our debt is being retired. Done. Fin. At the same time, Congress is still in session and is suddenly in a position to authorize spending without having to deal with the canard of not having enough money. (Which, as MMTers know is NEVER the case for the US government but that is not for this blog post.) The issue would be that if we were able to mint the big coin the optics and political will around everything else changes.

As Paul Krugman cites in his 2012 book, End This Depression Now!,

And early this year, with the debate having shifted perceptibly toward a renewed focus on jobs, Republicans were on the defensive. As a result, the Obama administration was able to get a significant fraction of what it wanted…without making any major concessions.

So the first thing Congress now has is a free hand, policy space, to deal with unemployment. In point of fact, the take-over of the national zeitgeist by drummed-up concerns over debt and deficit (see a brief discussion on why FAUX News and company are so dedicated to this mantra near the end of this post) has been allowed to relegate unemployment to the backseat. Putting unemployment in the backseat in order to talk about imaginary problems denies the absolute fact that unemployment is still driving the car. So, if you are wondering why the US economy is still swerving all over the damn road, that’s the reason right there. Platinum coin seigniorage would put unemployment right back in the front seat and, in a matter of a very short time, could put everyone who wants a full-time job back to work. (The resting rate for unemployment is said to be around 3.5% so don’t ever think we are looking for Gadot/zero.)

That should be reason enough for progressives to be the biggest cheerleaders of PCS – but wait, there’s more.

Strict and seriously enforced environmental regulation could be enacted and, instead of using indirect reward like tax breaks which tie up liquidity for tiny and giant corporations alike, the government could provide upgrade grants. Jobs are created and, I love this part, everyone benefits except the bankers. Also, this would move corporations from opposing such regulation to supporting it. Imagine, all you environmentalists out there, being on the same side of an argument as American Electric Power. We still would have problems with them (“Clean Coal” anyone?), I know that, but we could move with them further down a road which would benefit all of us collectively. For small corporations, it would make it possible for them to come in to compliance with regulations which they are commonly exempt from because, if included, they would not have been able to comply.

It would allow this nation to address long-standing infrastructure crisis’ including the electrical grid, water treatment and transportation. Even major improvements to existing systems, like rail, would benefit the economy and each one of us enormously.

We could not only invest in disaster preparedness, we would have the ability to set aside funds to deal with the coming, rapidly increasing, rate of disasters including things like the fires in the West, draught in the Midwest and that’s before I even get to superstorms and hurricanes. Of course, I am already assuming that should funds be perceived as being available, the needs of the states and victims hit by Sandy would be addressed.

And on and on and on – in a manner metered by Congress and the Fed up to the point where industrial utilization is near peak levels and unemployment is down near 3.5%.

Perceived Funds

The reality is that the coin is not a necessity. All that it does is give physicality to an accounting transaction. Large PCS would make it plain to all that the US government will not and cannot run out of money. There are constraints on our economy (inflation and the exchange rate) but “having enough money” is not one of them. The ability to spend whatever we need to bring the economy into balance has been available to the government since 1971, since the day the US dollar became a fiat currency, we just haven’t realized it and haven’t used it.

What progressives need to know is that the things we want, the things we have been calling out for from the wilderness, become possible with Large PCS. Also, if by some minute chance we were able to get this President to order large PCS then we could all wipe trickle-down economics off the bottoms of our kicks on the nearest patch of grass. If for that and no other reason, we should all be getting behind this right now.

So, Why Do We Think Debt is a Big Deal?

Debt, given the current state of our economy, means nothing, so why do we, the progressives, the reality-based group, the group that actually thinks math is a real thing, believe it when we hear it? Well, folks, you have been duped and, no surprise here, you have been duped by FAUX News and company. I know, you don’t listen to FOX but you do listen to people who listen to them and all those people drank the Kool-aid. Rabbits are big on water. We oppose Kool-aid on principle. (This would probably not be the case if the orange flavor was carrot instead of orange.) Rabbits, like all prey animals, are adamantly focused on the real world so we were not taken in.

Still, one has to ask, why this meme is so important to conservatives?

Simple. Greed. Surprised? Of course not. In the dictionary under “conservative” the definition says “greedy bastards.” We all know that. So, how does their greed tie in here, you ask? Well, to start with, Pete Peterson knows. If we cut social security for reasons of austerity, where do those people go? They go right to Wall Street. If we cut Medicare, where do those people turn? They turn to the insurance industry. If anyone other than the government is funding projects where is that money coming from? Why, it is coming from the banking industry, of course. So, here is the equation:

Wall Street + Insurance Companies + Banks = Non-stop Debt Crisis Meme

That’s it. That simple. This other equation,

Platinum Coin Seigniorage = Policy Space

has been here through this entire crisis and has had nary a whisper until #MintTheCoin took off just a couple of short weeks ago and we, as progressives, absolutely must get on board. If you ever, in your entire life, wanted to be a part of making a real change that could change everything for the better, this is it. Platinum coin seigniorage isn’t the golden ticket but it’s pretty damn close. Thump!

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Memes are a strange thing. One never can really predict what will catch on and what will die with a mingy wimper. Still, economist Stephanie Kelton has to be pretty thrilled that #MintTheCoin has gained traction. She, and the entire rest of the Modern Monetary Theory (MMT) community of economists, have certainly been waiting long enough. #MintTheCoin is Dr. Kelton’s (@deficitowl) current contribution to Twitter and it’s an important one but I’ll bet you don’t know why.

Hint: the answer isn’t “debt ceiling.”

The meme has caught fire and is being promoted by the likes of both Paul Krugman and Salon (…’nuff said) as a solution to the debt ceiling via the hastily lashed together vehicles of the 14th Amendment to the US Constitution and Title 31 of the United States Code Subtitle IV, Chapter 51, Subchapter II, Section 5112. I am not going to repeat the basics of the meme because they are splashed all over the web. If you have been dead for the last couple of weeks and somehow missed them you can catch up here, here, and here. There is also, of course, the idiotic GOP response codified, for the moment, in the bill being introduced by Congressman Greg Walden (R-OR) to prevent the President and Secretary of the Treasury from taking the option of the now infamous platinum coin. My favorite part of this legislation is that it tacitly acknowledges that the Secretary of the Treasury really does have the right to mint the coin making any argument to the contrary just that much more difficult. Derp. The part of this legislation that makes me want to put my face through glass is when the Congressman drops his pail down into the my-small-business-can’t-print-money-well to which I respond,

Listen up, Dimwit, the US Federal Government is NOT a business or family and it CAN and SHOULD print money.

Now, I’ll grant you that the world is a big place and some of you thought you had better things to do than to read my post on Modern Monetary Theory vs the Fiscal Cliff (this link is to the Daily Kos cross-post because the discussion thread was excellent there) but if you do not understand the statement above, stop now and read the older post. I’m not kidding. Stop. Now. Thump!

For everyone who did not stop I am going to go forward with the assumption that you fully understand the following things:

  • The budget of the Federal government is in no way, shape or form like that of your family or of any business and likening the Federal budget to the budget of a small business is the same as likening kittens to helicopters. (Ok, both look pretty funny when they are flying through the air but other than that….)
  • The Federal government is not balancing a budget, it is balancing an economy and the delimiters of that balance are unemployment, exchange rates and inflation. Period. End of story.
  • Deficits mean NOTHING. Debt means very, VERY little.
  • The US economy has nothing what-so-ever in common with any country which uses the Euro so comparisons to Spain or Greece or Italy are, again, kittens to helicopters.

Again, if there are any of the above which are unclear to you, go back to the older post. I mean it. *glare*

What has to be thrilling the MMT community to the tips of their pointy little heads is the fact that the platinum coin is breaking into consciousness at all because they have been talking about it for a long time for a whole different reason.

Zeroing Out the US Debt

News Flash: the platinum coin could be used to zero out the entire US debt held by the Fed. Done. Gone. I’m going to nibble on some hay while you think about that. … … … … … … Done? I didn’t think so but no one has ever credited me with patience.

There are, of course, two things to know about this approach and the most important is that it is totally unnecessary because given the current (stronger than you realize) position of the US economy and the fact that we have a fiat currency, debt actually means very, VERY little. It is, essentially, a matter of an internal balance sheet adjustment and if someone wants to make a pretty little coin or two or fifty to make it more real, well isn’t that just precious. What this would do instead is allow the funds which are being spent in service of our current debt to be pumped back into the private sector, in a controlled fashion, until we have reached full employment, at which point the spigot would be reduced to a normal flow.

What’s that? I can hear the anguished screams all the way from here. No, inflation is not a factor. Inflation is caused when demand exceeds supply and our economy is no where close to that margin. There is huge room for growth and capacity utilization rates remain exceedingly low. There, there. *pat, pat* I know. It’s a shock because those GOP bullies have been pushing the Debt-bad/Inflation-nigh meme for so long and you actually had started to believe it. If you need more solace on this issue, go to Bill Mitchell’s Billy Blog, for an excellent explanation.

Snipe Hunting

The real truth is that debt isn’t bad. At least, not at our current levels and in our current financial position. Still, we have listened to the GOP and the Tea-baggers rail on it for so long that it is as if we, as a nation, have been on a snipe hunt and we actually believe there are real snipes out there. Let me do you this favor and smack you upside the head, *SMACK!* Wake up!!!

There are not now and there never were actual snipes and because it does not serve our nation and economy for the private sector (all US individuals and businesses) to be in the red and because we will absolutely have a trade deficit for the foreseeable future (which is the international sector), the laws of accounting (if confused, refer to both my previous post on MMT and my previous *glare*) say that the public sector (the Federal budget) MUST be running a deficit . If we just can’t make ourselves comfortable with that than let’s pretend otherwise by zeroing out the debt with a magical coin. Here’s the bottom line. The debt means NOTHING and the coin means NOTHING and using them to cancel each other out so that we feel better is silly but not necessarily a bad thing. Plus, of course, it frees up all the money necessary to get everyone who wants to work back to work… oh, and to invest in the changes necessary to address climate change, invest in education, rebuild our national infrastructure, solve the long-term healthcare crisis…among a few other little things.

The IMF’s Giant Facepalm

…and then there’s the International Monetary Fund (IMF.) These genius’ have been at the head of the austerity bandwagon for years as they have dutifully strong-armed (and worse) economy after economy into the ground with their iron-clad commitment to austerity. …except they were wrong. Totally and completely, absolutely and irrevocably (in some cases) wrong. Now, it’s one thing for me to say this. What is one rabbit against the all-powerful genius of the IMF? So I had to laugh (and cry a little) when they finally acknowledged that they have been wrong all along. As it turns out, when an economy is struggling and it implements austerity, things get worse. Conversely, when countries, like Germany, Austria and the US (thank you, President Obama), use stimulus, they experience improvement. Why? Because (and here I apologize for repeating myself) a country is not balancing a budget, it is balancing an economy. WHO CARES what a ledger says! What matters is that people are working, the temperature of inflation is cold and the exchange rate is reasonable. Those are the only three things that matter. Everything else is just a snipe no matter what the Tea Party or the GOP or the IMF has to say.

In Closing

The Giant Platinum Coin IS an interesting concept. It IS worth thinking about but it is wasted on an imaginary “problem” like the debt ceiling. Oh, it’s not that it can’t or shouldn’t be used there. It’s just that if we really want to get the GOP to shut the thump up and we really want to change the future of our country and the lives of our citizens, we won’t just stop there. But that is, of course, just one rabbit’s opinion.

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I am writing an educational post today which will attempt to describe, in the simplest terms possible, Modern Monetary Theory (MMT) and its place in the current national conversation.  I fully accept that rational thought will play absolutely no part in whatever agreement is ultimately reached in Washington, DC so that is not really at issue. This post will be neither political nor funny. I also feel obligated to provide this disclaimer. I am a member of the one percent. As a rabbit American of means, I live an exceedingly comfortable lifestyle which is seen to by my large staff. I have significant investments, including substantial holdings in carrot, kale and blueberry futures. Honestly, I couldn’t care less about the fiscal cliff because my every whim will be met regardless. I sense however, that not all of you are in a similar position. I know my staff thinks they have cause for concern. In terms of what lawmakers may decide to do, my staff is right. In terms of economics, they really are wrong. Allow me to explain.

In making my most critical, essential and earth-shattering point, I will try to be as subtle as I can.

The Federal deficit is not big ENOUGH.

There. I said it. Go back and read it again just in case you missed the emphatic nature of this statement. Got it? Oh, I see, not really. I suspected as much. Allow me to explain and to provide links to more experts on this subject than you will ever have time to read but really, really should because it is fascinating stuff. It is also important that I note here that MMT is politically neutral. It is not a proposal for fiscal policy. MMT is a description of the current monetary structure as it has been ever since the US went off the gold standard. That it is not widely understood is an understatement.

I attended the University at All-Bunny (SBUNY) and when I took macroeconomics the words “modern monetary theory” never crossed the lips of any of my professors. Later, as a grad bunny, I attended some evening lectures during which MMT was introduced but the theory was young and had not fully coalesced. I say this not because I think you care about where I first heard about MMT but because there is a reason you probably don’t know anything about it either. Either you, like me, matriculated prior to the advent of MMT or your professors, like virtually all those in the country, were not exposed to MMT during their training so they did not pass it on to you. Either way, MMT is only beginning to enter the general knowledge-base because it simply takes a while for new information to gain a footing especially in an area as staid as economics. Still, given the potentially society-changing negotiations going on in Washington right now, this seems a reasonable time to point out that no matter what they decide, they are likely to be wrong because, as anyone who has paid informed attention to the monetary crisis in Europe knows, austerity measures are a death knell for already stressed economies. Nation states that are locked into a fixed currency, like all those who participate in the Euro, have turned over the control of their economies to forces which have no interest in acting in the best interest of each individual country. But, and this is important, the United States is NOT in this position.

Fiat Currency

Once upon a time the US was the prime signatory to the Bretton Woods Monetary System wherein forty-four allied nations agreed to tie their currencies to the US dollar at a fixed rate. The US dollar was tied to gold. This acted, for a time, to stabilize world currency markets and pushed then much needed security throughout the system. Eventually though, because gold is a limited commodity, being tied to the gold standard began to seriously impinge upon the US economy so, in 1971 President Nixon, with the so-called “Nixon Shock”, took the US out of Bretton Woods and off the gold standard. This was a huge deal, bigger even than I can describe. The United States now had a pure, fiat currency (meaning that the currency does not, in itself, have intrinsic value) and that the US, as the issuer of said currency, had new and significantly increased power to make much broader discretionary decisions in terms of economic policy. But a funny thing happened. US monetary policy makers didn’t really do much with their new found freedom.

To begin to explain this I must first make something very, Very, VERY clear – a US federal budget is nothing what-so-ever like your personal household or business budget in any way, shape or form. It’s not. See – you aren’t getting this.

It…is…not…like…your…family…budget.

Period. Do you see why? You don’t do you. *sad face* Well, you are in good company. Most of the country and, to the best of my knowledge, every single member of the House of Representatives, is right there with you. Here’s a hint. You have to work for your money. A business has to produce goods, or services, or, if it is Bain Capital a vulture capital firm, steal money in order to have any. The US government is an issuer of currency. They don’t have to earn it. They print it. (Do NOT go to the “inflation” place yet. I’ll get there later.) Let’s just stay focused on the simple fact that the big difference between the US government and you or me is that they will never run out of the currency needed to cover their debts. (I KNOW. I’ll get to the inflation thing later. Stay focused.)

One of the most interesting things about fiat currency is that taxes are not actually a requirement. Neither is there a need to sell bonds or borrow currency. Do you know what happens when you pay your bill to the IRS in cash? They shred it. No joke. They make a note in their computers next to your account and then that cash is gone. Poof. The only real purpose of taxes is to drive value into the economy (see Sectors, below). Taxes are a way to move value back from the private sector into the public sector. Deficits are the opposite. Deficits are a way to leave value in the private sector. For example:

 if the Department of Defense spends $100 buying a wrench than the private company that sold it to them, let’s call this company Schmoing, gets that $100. The value has transferred from the public into the private sector. If Schmoing than turns around and pays their wrench supplier, ACE Hardware, $15 for the wrench, $15 of the value transferrs to ACE and $85 stays with Schmoing. If ACE than turns around and pays the actual maker of the wrench, a firm in China called Wrenches!, $5 for the wrench than $5 of the original $100 has now moved outside of the US economy. When tax time rolls around, Schmoing and ACE both pay taxes against the profit they made on the sale of the wrench. ACE pays $1 and …now here you know this is just imaginary because in the real world Schmoing would pay nothing…but back to the story, Schmoing pays $9. So, of the original $100, the government received $10 back in taxes and $5 went out internationally (to China) leaving an $85 federal deficit but that money didn’t evaporate. It is still here, in our economy, in the private sector, which is where we all agree we want to keep the majority of the assets of the country.

Sectors

Just as math is math, accounting is accounting. There must be balance in the balance sheet. Understanding that the balance is more macro than we commonly think is why it is so difficult for us to accept that a federal deficit is a good thing. The federal government isn’t balancing a federal budget – they are balancing an economy. These are very different things. If they were balancing a budget, like certain legislators keep insisting is a necessity, than the worry would be that income (taxes) and outgo (government spending) are balanced. This is way,WAY TOO SMALL A VIEW and it’s wrong.

Our economy is divided into three sectors and it is these sectors which need to be in balance. The three sectors are the private sector (individuals and business), the public sector (local, state and federal governments) and the non-domestic sector (foreign individuals and businesses, domestic monies which get moved into foreign tax shelters, and foreign governments). As always in accounting, one sector’s asset is another sector’s liability. This is seen in the example given above when the $90 liability of the public sector becomes the $85 asset of the private sector and the $5 asset of the non-domestic sector. MMT has, therefore, two rules: all sectors cannot be in surplus at the same time and all sectors cannot be in deficit at the same time. Accounting has these same rules. This is nothing new.

As we all know all too well, the private sector cannot last for long in deficit without the economic consequence of recession becoming apparent. Likewise, at least in the US economy, we are not going to be without a trade deficit any time soon. I’m pausing here so you can all stop on the tracks and pay attention to the gigantic epiphany train that is about to mow you down. Yes, people, if we don’t want the private sector to be in deficit and we can’t have the non-domestic sector in deficit than the only option is to have the public sector run a deficit. It’s a basic principle of accounting. It isn’t complicated.

It just isn’t what we have been taught. We have been taught to view the US budget as if it were separate of you and I, an independent entity which required internal balance. Instead, MMT proves that the public and private sectors are two of the three legs upon which this meta entity, the US economy, stands. So when you hear legislators scream about a deficit or you see a Tea Party protestor carrying a sign that says “Say NO to Socilism” on one side and “Don’t Mortage  My Daugters’ Future” on the other side (after you get done laughing at the spelling) the response to this is simple – better you than me because you, meaning the US Treasury, can issue currency as you need it and I can’t.

So why are Italy and Greece in so much trouble with their deficits? That’s obvious. Neither country has control over its currency. Currency itself is, indeed, limited and has become, essentially, a commodity. In the overall European Union ecosystem, essentially, Germany has boomed at the cost of Greece and Italy. It’s that balancing thing again. Still, it’s easy to think of it this way. In the mid 1990′s, Italy had approximately X debt. They were not in crisis. They were a fully functioning economy and they paid their debts in Lira. Today, Italy also has X debt. Notice that this is the same amount. they are not any further in debt than they were but suddenly it is a debt crisis. Why? Well, it’s the Euro, of course. Italy is at the mercy of the Euro and there is no advantage to the Euro in favoring Italy so Italy is drowning under a bad debt they cannot pay with limited Euros.

What we want here in the US is what MMT theorists refer to as a good deficit. A good deficit is one which operates in an unconstrained way in terms of time and arbitrary limits. By contrast, fiscal austerity is deficit by design. Fiscal austerity directly impedes the growth of the private sector. New wealth is only created by the issuing monetary authority. Here, stand on this other train track while I explain this part. (Pay no attention to the giant locomotive that is moving in your direction.) I’ll return to the previous example.

Let’s say Schmoing sells that $85 wrench to Borthrop-Humman instead of the federal government. The value has passed from Borthrop-Humman to Schmoing but it remains in the private sector. It is not new wealth it’s just recycled. Even if Schmoing built the wrench from scratch, all the components were purchased from within the private sector and on the balance sheet the value still remains there. None of it is new.

BAM! *splat* *train wooshes by* Yeah, I know. I felt that way too. I always thought that because we built the thingie we were creating the wealth. My bad. I forgot that we may be building the thingie, the wrench in this case, but it has no monetary value. There is no money to pay for the wrench unless the issuing authority has issued said currency into the system and that can only be done by taking less out in taxes and/or pushing more in with government spending.

Professor Stephanie Kelton, Research Scholar at the Levy Economics Institute and one of the leading authorities on MMT has this to say,

So, let’s focus in on a specific period of time.  The period in the late 1990s and early 2000s when for the first time in decades the US government ran budget surpluses….  Many people would inherently think that would be a good thing.  It shows fiscal responsibility.  Not only did they balance the budget, but they put it in surplus.  Meanwhile, our current account deficits were huge.  The rest of the world was running large positive balances against the US.  That reduced US private-sector savings.  Surpluses fell.  It pushed the private sector into deficit on an unprecedented scale.  The private sector went from surviving above the zero line to being pushed below zero.  And the private sector remained there for a period of years, spending more than its income, borrowing to do it.  And it was all fueled by a massive bubble economy that ended in recession, which drove the public sector’s balance back into deficit where it belongs.

When an economy is already in recession what it needs most desperately is new wealth and, with a fiat currency, that can only come from the issuing authority.

Inflation, Currency Exchange Rates and Unemployment

When was the last time your foot hat the flu? That’s because the flu is systemic. When one part of your body has it, your whole body has it. When an economy is in recession, it is systemic. Everything is effected. It is a meta problem. The odd thing about the US is that we have made choices to try to resolve our crisis without using the single most powerful weapon we have at our disposal. With any fiat currency there are only three things to watch for and none of them are deficit spending. The three economic delimiters are inflation, exchange rates and unemployment. As you can see, these things relate, directly, to each of the sectors.

In the past, deficit hawks and doves alike have tried to assail MMT theorists with the inflation argument. Just within the last three years some of the biggest names in economics, including some of the leading economic advisors to the US Department of Treasury and the Fed, have come to realize what MMT theorists have long known. If you are the issuer of the currency, you do not have to be at the mercy of bond vigilantes. As I said many paragraphs back, the US does not need to sell bonds or borrow currency in order to spend. These are habits and levers we employ as part of fiscal policy but they are not a necessity in terms of financing expenditures. It is interesting to know that the Secretary of the Treasury can order to be struck the currency of his choosing and deposit it in the federal accounts. Just like that. Congress would melt down in a fit of apoplexy, but it would be legal. The money gets injected into the economy and people go back to work. In fact, it would be easy and fast to open up the spigot and return the economy to “full” employment (approximately 3.7% unemployment) within the next two or three years at the most. An economy only gets inflationary, too hot, if new wealth continues to be pumped into the economy after the employment goal is achieved. Up until that time, provided there are no exigent commodity constraints, the supply remains in excess of the demand so inflation does not become a factor.

Again, from Professor Kelton,

Cash registers don’t discriminate. When you spend money in the economy there isn’t someone on the other end saying, ‘will that be public or private today?’ A dollar spent is a dollar spent. The federal government could SAFELY lower taxes, increase government spending, allow aggregate demand to increase.

Inflation is when demand outstrips supply. In the 1970′s this was because there was a sudden commodity shortage. The supply of oil was choked down to a trickle by the newly formed OPEC. Every product that used petrochemicals was effected. Trucks used to transport food needed expensive gas to get cheap lettuce transported across the country. The price of carrots went through the roof. Americans, with their huge gas-guzzling cars, waited in lines for gasoline. The economy could not take the shock. Unemployment rose at the same time prices spiked. Stag-flation was the new buzzword. This period is a classic example of what is called “demand-pull inflation.”

Money is not a commodity. It is not intrinsically limited. It is in no way comparable to oil (or gold). There is no reason that the US government should not be spending money to drive employment. The US dollar is not at risk of major devaluation and both short and long-term bond rates are at or just barely above zero. In other words, no one anywhere thinks the US economy is at risk of not being able to make its loan or bond payments. This is because all the investors, foreign and domestic, know that we are in full control of our currency. They are not at risk.

Final Thoughts

We have all become comfortable with viewing the federal budget just as we would view one small part of a much larger elephant. We each imagine that the “wall” or the “rope” that is in front of us is the whole thing. We each think it looks much like our personal budget only on a bigger scale. In fact, the meta whole is orders of magnitude larger and that entire pachyderm is sitting on a train that is, once again, headed right for you.

Over the next few weeks and months, the President and legislators from both Houses are going to be fighting over an imaginary “crisis” they have dubbed the fiscal cliff.  This battle is entirely unnecessary. Our leadership is so used to thinking in terms of the gold standard that they still don’t know that a whole new age has dawned. The emphasis of MMT is in the power of the State to move within a substantially increased policy space which is largely unconstrained by monetary limitations.

For my part, I’ve told you about it. For your part, please pass this information on to your legislators and to anyone else you know. Post it on your Facebook page. Design a bumpersticker. Just don’t stay quiet.

I’ve digested quite a bit on MMT in recent weeks. I even read some of it before I ate it. A lot of what  read really gets down into the weeds but some was quite accessible and can be found in the following places:

Professor Stephanie Kelton manages the New Economics Perspectives website and is on Twitter as deficitowl . The quotes above were from her excellent interview for Meidaroots. You can also download the truly fabulous podcast she did last week on The Majority Report with Sam Seder.

The Modern Monetary Theory Primer by Dr. L. Randall Wray is a bit weedy but essential for all those interested in MMT. This is the beginnings of what appears to be on its way to being a textbook.

Joseph Firestone who blogs on DailyKos as LetsGetItDone and at Corrente.com in their MMT blog does a commendable job of drawing all the big concepts together.

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