Hans-Olaf Henkel's piece in today's Financial Times is making waves. Okay, Henkel is an odious man, but my view, which was once considered borderline crazy, is now getting more serious consideration. The Germans were willing to go into a currency union because by construction that agreement removed the weapon exchange rate depreciation from its competitors. German real wage discipline, labor productivity gains, and engineering innovation could not be undercut at the stroke of a pen. Recall that there are basically 3 Germanys:
Tuesday, August 30, 2011
Tuesday, August 30, 2011
The Washington Mutual Wish List: Optimizing a Criminogenic Environment
By William K. Black
(Cross-posted from Benzinga.com)
On November 7, 2007, the Financial Services Roundtable released its “The Blueprint for U.S. Financial Competitiveness.” I explained in a three-part series of columns how Federal Home Loan Bank Board Chairman Ed Gray and Office of Thrift Supervision Director Tim Ryan led crackdowns on the “control frauds” that caused the S&L debacle. I emphasized how Gray did so in the face of enormous political opposition from the Reagan administration, Speaker of the House Jim Wright, a majority of the House of Representatives, and the “Keating Five.” One of the odd moments during these political attacks was that a Republican Representative from the Dallas area requested a meeting with Gray when Speaker Wright’s attacks on Gray’s reregulation of the industry and actions against the control frauds were becoming public an notorious. In my naiveté, I thought that Bartlett requested the meeting to support his fellow Republican, Gray. Of course, Bartlett’s purpose was the opposite. He was enraged by our efforts against the Texas control frauds and wanted us to back off. Years later, after a stint as Dallas’ mayor, the Financial Services Roundtable made Bartlett its head, a position he continues to occupy.
(Cross-posted from Benzinga.com)
On November 7, 2007, the Financial Services Roundtable released its “The Blueprint for U.S. Financial Competitiveness.” I explained in a three-part series of columns how Federal Home Loan Bank Board Chairman Ed Gray and Office of Thrift Supervision Director Tim Ryan led crackdowns on the “control frauds” that caused the S&L debacle. I emphasized how Gray did so in the face of enormous political opposition from the Reagan administration, Speaker of the House Jim Wright, a majority of the House of Representatives, and the “Keating Five.” One of the odd moments during these political attacks was that a Republican Representative from the Dallas area requested a meeting with Gray when Speaker Wright’s attacks on Gray’s reregulation of the industry and actions against the control frauds were becoming public an notorious. In my naiveté, I thought that Bartlett requested the meeting to support his fellow Republican, Gray. Of course, Bartlett’s purpose was the opposite. He was enraged by our efforts against the Texas control frauds and wanted us to back off. Years later, after a stint as Dallas’ mayor, the Financial Services Roundtable made Bartlett its head, a position he continues to occupy.
Monday, August 29, 2011
Matchmaker, Matchmaker Find Me a Job
By Stephanie Kelton
Good news. Republicans have just unveiled a bold new plan (see below) to create jobs in the private sector. Don't worry, it isn't another "wasteful" stimulus package that hires people to repair roads and bridges or helps state and local governments hold onto their teachers and firefighters. This one won't cost the government a dime! It's a simple idea, really. A good old-fasioned meet-and-greet, where throngs of unemployed Americans can claw their way through a crowd of equally desperate men and women looking to land the perfect mate. I mean a reasonable match. I mean any job whatsoever.
Good news. Republicans have just unveiled a bold new plan (see below) to create jobs in the private sector. Don't worry, it isn't another "wasteful" stimulus package that hires people to repair roads and bridges or helps state and local governments hold onto their teachers and firefighters. This one won't cost the government a dime! It's a simple idea, really. A good old-fasioned meet-and-greet, where throngs of unemployed Americans can claw their way through a crowd of equally desperate men and women looking to land the perfect mate. I mean a reasonable match. I mean any job whatsoever.
Monday, August 29, 2011
Today's Modern Money Primer
The second part in Wray's discussion on the origin of coins is now available. If you are new, check out the Modern Money Primer. You'll find part one of this series, as well as the most thorough introduction to MMT, short of enrolling at UMKC as a grad student.
Monday, August 29, 2011
MMP Blog #13: Commodity Money Coins? Metalism versus Nominalism, Part Two
By L. Randall Wray
Last week we examined the origins of coins, arguing that coinage is a relatively recent development. From the beginning, coins did have precious metal content. We examined a hypothesis for that, because from the MMT view, the “money thing” is simply a “token” or record of debt. If that is true, why “stamp” the record on precious metal? For thousands of years, debts were recorded on clay or wood or paper. Why the switch? We argued that the origins of coins in ancient Greece must be placed in the specific historical context of that society. Use of precious metal was not a coincidence, but also was not consistent with the commodity money view. While it is true that use of precious metal was important and perhaps even critical, this was for social reasons and was tied to the rise of the democratic polis. This week we examine coinage from Roman times to the present in Western society.
Roman coins also contained precious metal. But there is very little doubt that Roman law adopted what is called “nominalism”—the nominal value of the coin is determined by the authorities, not by the value of embodied metal in the coin (termed “metalism”). The coin system was well-regulated and although precious metal content changed across coinages, there was no significant problem with debasement or inflation. In Roman law, one could deposit a sack of particular coins (in sacculo) and when repaid demand the same coins to be returned (vindication). However, if one were owed a sum of money (rather than specific coins), one had to accept in payment any combination of coins tendered that were “money of the realm”—officially sanctioned coins with payment enforced in court (condictio).
This practice continued through the early modern period, in which one deposited for safe keeping either sealed sacks of coins (and could demand exactly the same coins back in the still-sealed bag) or loose coins (in which case, any legal coins had to be accepted). Hence, “nominalism” prevailed in the general although what appears to be a form of “metalism” applied to specific coins in sacculo.*
In reality, it had more to do with the view that coins were a “moveable chattel”, something the owner had a property interest in. However, once the owner’s loose coins were mixed with other coins, there was “no earmark”—no way of determining specific ownership and hence the claimant only had a claim to be repaid in legal money—the legalis moneta Angliae, for example in England, which was stipulated to be a sum of “sterlings”. There was no sterling coin (indeed, England did not even coin the Pound, its money of account), rather, the debt was paid up by providing the appropriate sum of coins declared lawful money by the Crown—and could include foreign coins—at the nominal value dictated by the King.
The authorities that issued coins were free to change the metal content at each coinage; penalties for refusing to accept a sovereign’s coin in payment at the value stated by the sovereign were severe (often, death). Still, there is the historical paradox that when the King was paid in coin (in fees, fines and taxes), he would have them weighed—and reject or accept at lower value the coins that were low weight. If coins were really valued nominally, why bother weighing them? Why did the issuer—the King—appear to have a double standard, one nominalist, one metalist?
In private circulation, sellers also favored “heavy” coins—those that weighed more, or that were of higher fineness (more precious metal content). They certainly did not want to find themselves in the situation of trying to make payments to the Crown with low weight coins. Hence, a “Gresham’s Law” would operate: everyone wanted to pay in “light” coins, but to be paid in “heavy coins”. There was thus obvious concern with the metal content of coins, and fairly accurate (and quite tiny) scales were manufactured and sold to weigh coins individually. This makes it appear to modern historians (and economists) that “metalism” reigned: the value of coins was determined by metal content.
And yet we see in the courts rulings indications that the law favored a nominalist interpretation: any legal coin had to be accepted. And we see Kings who imposed long prison terms (the sentence was usually to serve “at the King’s pleasure”—a nice way of putting it! One can just imagine the King’s pleasure at holding indefinitely those who refused his coins.), or death, for refusing any coin deemed legal. It all appears so confusing! Was it nominal or was it metal?
The final piece of the puzzle appears to be this: until modern minting techniques were invented (including milling and stamping), it was relatively easy to “clip” coins—cut some of the metal off the edge. They could also be rubbed to collect grains of the metal. (Even normal wear and tear rapidly reduced metal content; gold coins in particular were soft. For that reason they were particularly ill-suited as an “efficient medium of exchange”—yet another reason to doubt the metalist story.)
This is why the King had them weighed to test for clipping. (As you can imagine the penalty for clipping was severe, including death.) If he did not, he would be the victim of Gresham’s Law; each time he recoined he would have less precious metal to work with. But because he weighed the coins, everyone else also had to avoid being on the wrong side of Gresham’s Law. Again, far from being an “efficient medium of exchange”, we find that use of precious metals set up a destructive dynamic that would only finally resolved with the move to paper money! (Actually, even paper is less than ideal; perhaps some readers have experienced problems getting older paper money accepted—as I did even in Italy before it adopted the euro—due to Gresham Law dynamics. Thank goodness for computers and keystrokes and LEDs.)
Kings sometimes made those dynamics worse—by recanting his promise to accept his old coined IOUs at previously agreed upon values. This was the practice of “crying down” the coins. Until recent times, coins did not have the nominal value stamped on them—they were worth what the King said they were worth at his “pay houses”. To effectively double the tax burden, he could announce that all the outstanding coins were worth only half as much as their previous value. Since this was the prerogative of the sovereign, holders could face some uncertainty over the nominal value. This was another reason to accept only heavy coins—no matter how much the King cried down the coins, the floor value would be equal to the value of the metallic content. Normally, however, the coins would circulate at the higher nominal value set by the sovereign, and enforced by the court and the threat of severe penalties for refusing to accept the coins at that value.
There is also one more aspect to the story. With the rise of the Regal predecessors to our modern state, there were the twin and related phenomena of Mercantilism and foreign wars. Within an empire or state, the sovereign’s IOUs are sufficient “money things”: so long as the sovereign takes them in payment, its subjects or citizens will also accept them. Any “token” will do—it can be metal, paper, or electronic entries. But outside the boundaries of the authority, mere tokens might not be accepted at all. In some respects, international trade and international payments are more akin to barter unless there is some universally accepted “token” (like the US Dollar today).
Put it this way: why would anyone in France want the IOU of France’s sworn enemy, the King of England? Outside England, the King’s coins might circulate only at the value of precious metal contained in them. Metalism as a theory might well apply as a sort of floor to the value of a King’s IOU: at worst, it cannot fall in value much below gold content as it can be melted for bullion.
And that leads us to the policy of Mercantilism, and also to the conquest of the New World. Why would a nation want to export its output, only to have silver and gold return to fill the King’s coffers? And why the rush to the New World to get gold and silver? Because the gold and silver were needed to conduct the foreign wars, which required the hiring of mercenary armies and the purchase of all the supplies needed to support those armies in foreign lands. (England did not have huge aircraft to parachute the troops and supplies into France—instead they hired mainland troops and bought the supplies from the local outfitters.) There was a nice vicious circle in all this: the wars were fought both by and for gold and silver!
And it made for a monetary mess in the home country. The sovereign was always short of gold and silver, hence had a strong incentive to debase the currency (to preserve metal to fund the wars), while preferring payment in the heaviest coins. The population had a strong incentive to refuse the light coins in payment, while hoarding the heavy coins. Or, sellers could try to maintain two sets of prices—a lower one for heavy coins and a high one for light coins. But that meant toying with the gallows.
The mess was resolved only very gradually with the rise of the modern nation state, a clear adoption of nominalism in coinage, and—finally—with abandonment of the long practiced phenomenon of including precious metal in coins.
And with that we finally got our “efficient media of exchange”: pure IOUs recorded electronically. Precious metal coins were always records of IOUs, but they were imperfect. And boy have they misled historians and economists!
Admittedly, I have not yet made a thorough case that money must be an IOU, not a commodity. We need some more building blocks first.
References
* I thank Chris Desan, David Fox, and other participants of a recent seminar at Cambridge University for the discussion I draw upon here.
Last week we examined the origins of coins, arguing that coinage is a relatively recent development. From the beginning, coins did have precious metal content. We examined a hypothesis for that, because from the MMT view, the “money thing” is simply a “token” or record of debt. If that is true, why “stamp” the record on precious metal? For thousands of years, debts were recorded on clay or wood or paper. Why the switch? We argued that the origins of coins in ancient Greece must be placed in the specific historical context of that society. Use of precious metal was not a coincidence, but also was not consistent with the commodity money view. While it is true that use of precious metal was important and perhaps even critical, this was for social reasons and was tied to the rise of the democratic polis. This week we examine coinage from Roman times to the present in Western society.
Roman coins also contained precious metal. But there is very little doubt that Roman law adopted what is called “nominalism”—the nominal value of the coin is determined by the authorities, not by the value of embodied metal in the coin (termed “metalism”). The coin system was well-regulated and although precious metal content changed across coinages, there was no significant problem with debasement or inflation. In Roman law, one could deposit a sack of particular coins (in sacculo) and when repaid demand the same coins to be returned (vindication). However, if one were owed a sum of money (rather than specific coins), one had to accept in payment any combination of coins tendered that were “money of the realm”—officially sanctioned coins with payment enforced in court (condictio).
This practice continued through the early modern period, in which one deposited for safe keeping either sealed sacks of coins (and could demand exactly the same coins back in the still-sealed bag) or loose coins (in which case, any legal coins had to be accepted). Hence, “nominalism” prevailed in the general although what appears to be a form of “metalism” applied to specific coins in sacculo.*
In reality, it had more to do with the view that coins were a “moveable chattel”, something the owner had a property interest in. However, once the owner’s loose coins were mixed with other coins, there was “no earmark”—no way of determining specific ownership and hence the claimant only had a claim to be repaid in legal money—the legalis moneta Angliae, for example in England, which was stipulated to be a sum of “sterlings”. There was no sterling coin (indeed, England did not even coin the Pound, its money of account), rather, the debt was paid up by providing the appropriate sum of coins declared lawful money by the Crown—and could include foreign coins—at the nominal value dictated by the King.
The authorities that issued coins were free to change the metal content at each coinage; penalties for refusing to accept a sovereign’s coin in payment at the value stated by the sovereign were severe (often, death). Still, there is the historical paradox that when the King was paid in coin (in fees, fines and taxes), he would have them weighed—and reject or accept at lower value the coins that were low weight. If coins were really valued nominally, why bother weighing them? Why did the issuer—the King—appear to have a double standard, one nominalist, one metalist?
In private circulation, sellers also favored “heavy” coins—those that weighed more, or that were of higher fineness (more precious metal content). They certainly did not want to find themselves in the situation of trying to make payments to the Crown with low weight coins. Hence, a “Gresham’s Law” would operate: everyone wanted to pay in “light” coins, but to be paid in “heavy coins”. There was thus obvious concern with the metal content of coins, and fairly accurate (and quite tiny) scales were manufactured and sold to weigh coins individually. This makes it appear to modern historians (and economists) that “metalism” reigned: the value of coins was determined by metal content.
And yet we see in the courts rulings indications that the law favored a nominalist interpretation: any legal coin had to be accepted. And we see Kings who imposed long prison terms (the sentence was usually to serve “at the King’s pleasure”—a nice way of putting it! One can just imagine the King’s pleasure at holding indefinitely those who refused his coins.), or death, for refusing any coin deemed legal. It all appears so confusing! Was it nominal or was it metal?
The final piece of the puzzle appears to be this: until modern minting techniques were invented (including milling and stamping), it was relatively easy to “clip” coins—cut some of the metal off the edge. They could also be rubbed to collect grains of the metal. (Even normal wear and tear rapidly reduced metal content; gold coins in particular were soft. For that reason they were particularly ill-suited as an “efficient medium of exchange”—yet another reason to doubt the metalist story.)
This is why the King had them weighed to test for clipping. (As you can imagine the penalty for clipping was severe, including death.) If he did not, he would be the victim of Gresham’s Law; each time he recoined he would have less precious metal to work with. But because he weighed the coins, everyone else also had to avoid being on the wrong side of Gresham’s Law. Again, far from being an “efficient medium of exchange”, we find that use of precious metals set up a destructive dynamic that would only finally resolved with the move to paper money! (Actually, even paper is less than ideal; perhaps some readers have experienced problems getting older paper money accepted—as I did even in Italy before it adopted the euro—due to Gresham Law dynamics. Thank goodness for computers and keystrokes and LEDs.)
Kings sometimes made those dynamics worse—by recanting his promise to accept his old coined IOUs at previously agreed upon values. This was the practice of “crying down” the coins. Until recent times, coins did not have the nominal value stamped on them—they were worth what the King said they were worth at his “pay houses”. To effectively double the tax burden, he could announce that all the outstanding coins were worth only half as much as their previous value. Since this was the prerogative of the sovereign, holders could face some uncertainty over the nominal value. This was another reason to accept only heavy coins—no matter how much the King cried down the coins, the floor value would be equal to the value of the metallic content. Normally, however, the coins would circulate at the higher nominal value set by the sovereign, and enforced by the court and the threat of severe penalties for refusing to accept the coins at that value.
There is also one more aspect to the story. With the rise of the Regal predecessors to our modern state, there were the twin and related phenomena of Mercantilism and foreign wars. Within an empire or state, the sovereign’s IOUs are sufficient “money things”: so long as the sovereign takes them in payment, its subjects or citizens will also accept them. Any “token” will do—it can be metal, paper, or electronic entries. But outside the boundaries of the authority, mere tokens might not be accepted at all. In some respects, international trade and international payments are more akin to barter unless there is some universally accepted “token” (like the US Dollar today).
Put it this way: why would anyone in France want the IOU of France’s sworn enemy, the King of England? Outside England, the King’s coins might circulate only at the value of precious metal contained in them. Metalism as a theory might well apply as a sort of floor to the value of a King’s IOU: at worst, it cannot fall in value much below gold content as it can be melted for bullion.
And that leads us to the policy of Mercantilism, and also to the conquest of the New World. Why would a nation want to export its output, only to have silver and gold return to fill the King’s coffers? And why the rush to the New World to get gold and silver? Because the gold and silver were needed to conduct the foreign wars, which required the hiring of mercenary armies and the purchase of all the supplies needed to support those armies in foreign lands. (England did not have huge aircraft to parachute the troops and supplies into France—instead they hired mainland troops and bought the supplies from the local outfitters.) There was a nice vicious circle in all this: the wars were fought both by and for gold and silver!
And it made for a monetary mess in the home country. The sovereign was always short of gold and silver, hence had a strong incentive to debase the currency (to preserve metal to fund the wars), while preferring payment in the heaviest coins. The population had a strong incentive to refuse the light coins in payment, while hoarding the heavy coins. Or, sellers could try to maintain two sets of prices—a lower one for heavy coins and a high one for light coins. But that meant toying with the gallows.
The mess was resolved only very gradually with the rise of the modern nation state, a clear adoption of nominalism in coinage, and—finally—with abandonment of the long practiced phenomenon of including precious metal in coins.
And with that we finally got our “efficient media of exchange”: pure IOUs recorded electronically. Precious metal coins were always records of IOUs, but they were imperfect. And boy have they misled historians and economists!
Admittedly, I have not yet made a thorough case that money must be an IOU, not a commodity. We need some more building blocks first.
References
* I thank Chris Desan, David Fox, and other participants of a recent seminar at Cambridge University for the discussion I draw upon here.
Thursday, August 25, 2011
MODERN MONEY THEORY AND COMMODITY MONEY COINS: RESPONSES TO BLOG #12
By L. Randall Wray
Thanks for all the responses—this might have been a record number for the MMP. Coins are fascinating. I have to admit that even though my approach downplays the role of coins in monetary systems, I always head right to the coin displays in the museums. Indeed, when in Cambridge recently I was treated to a quick tour of the collection of the late Phillip Grierson, who not only was among the greatest numismatists who ever lived but also one of those who recognized that the origins of money are not to be found in markets. Rather, it was his hypothesis that money came out of the penal system (debts again!)—a view that I believe must be correct. But that is a topic for another day.
Today I will address the first set of comments on the MMT approach to “commodity money coins”. In Blog 12 I began to explain why the MMT view is that gold or silver coins are not examples of commodity money. Rather, they are simply IOUs of the issuer that happen to be stamped on precious metal.
On to the comments and questions.
Q1: What is MMT’s view of the reserve currency?
Answer: Well, today it is the Dollar; a century ago it was the Pound. MMT principles apply—it is a sovereign currency issued through keystrokes. The issuer of the reserve currency can either float (in which case the issuer does not promise to convert at a fixed exchange rate) or it can fix. As I have argued, fixing reduces domestic policy space. Reserve status probably increases external demand for the nation’s currency—which is used for international clearing. To satisfy that demand, the reserve currency issuer (the US today) either supplies the currency through the capital account (lending) or the current account (trade deficit, for example).
Many believe this allows the nation that issues the reserve currency to “get something for nothing”, often called “seigniorage”. This is largely false—did American consumers get free goods and services over the past decade as the US ran current account deficits? No, of course not. They are left with a mountain of debt. Did the US government get “something for nothing”? Well, perhaps—but all sovereign governments can be said to get something for nothing, since they purchase by keystrokes.
But that is not seigniorage—it results from the fact that sovereign government imposes liabilities on its population--taxes, fees, and fines. The US does it; but so does Turkey. Sovereign government first puts its population in debt, then it uses keystrokes to move resources to the public sector and its keystrokes create its IOUs that provide the means through which taxpayers can retire their tax debt. The sovereign’s currency can circulate outside the country to varying degrees, but that is ultimately because the sovereign’s citizens need it to pay taxes domestically—since foreigners are not normally subject to the tax.
So in principle the issuer of the reserve currency is not unique—although the external demand for the reserve currency is greater. We’ll study this more later; think of this brief response as an appetizer that is no doubt going to spur some “hegemonic” objections!
Q2: The CPI has increased by a factor of 7 since 1966. Is the currency still a store of value?
Answer: Well, sure it is--but as the commentator noted, it is not a good store of value in terms of purchasing power of a basket of consumer goods and services over a period as long as a half century. We can quibble about the use of the CPI as a measure of inflation—it has well known problems we will not pursue in detail here.
As Keynes argued, you need some “stickiness” of wages and prices in the money of account—or you might abandon money. That is what can happen in a hyperinflation. You try to find something else. But clearly except for a few gold bugs, US inflation since 1966 has been sufficiently low that the Dollar remained a useful money of account, and currency has been voluntarily held.
In truth, economists are hard-pressed to find negative economic effects from inflation at rates under, say, 40% per year. But clearly people do not like inflation when it gets to double digits.
Returning to Keynes, he said that no one would hold money as a store of value in the absence of uncertainty. Holding wealth in a highly liquid form like money makes sense only if you are uncertain, and even scared, about the future. In a financial crisis, everyone runs to cash. It gives a very low return, but that is better than a huge loss!
If you wanted a good store of wealth, and you were making a decision back in 1966 as to the portfolio you would hold until 2011, it is unlikely that you would have held much cash. There would have been many assets that would be better stores of value. However, if we are talking about a desirable portfolio to be held over the next few months, you probably would hold some cash. There is a trade-off between liquidity and return.
I know the gold bugs like gold; but those who bought it in 1980 were kicking themselves for the next 30 years, and still have not recouped their losses. In general, commodity prices fall over time in real terms—they are terrible inflation hedges—plus they have storage costs.
Let me just say I have no knowledge of Dungeons and Dragons—I suppose it is a board game like Monopoly--so I cannot answer Neil’s question about gold, silver, and copper pieces. But I think Monopoly still uses the same paper currency and same prices and rents? Not sure what the question is. Games don’t have to have inflation? OK—games have rules. I suppose inflation is not built into the rules of those games.
On Karl’s statement that past labor is not equivalent to today’s labor, hence, it is not surprising that wages and prices are higher today, I do believe he is onto a point.
We must adjust the CPI or other measures of price for quality improvements. How much would a modern laptop have cost in 1966? Millions of dollars? Billions? As Warren Mosler always jokes, your IPhone has more electronic wizardry than NASA was able to muster for the trips to the moon. The CPI is more of an art than a science—since we have to put prices on things that did not exist, and make imaginary quality adjustments.
Further there is something called the Baumol disease. A symphony orchestra back in Mozart’s time was as large as one today—give or take a few. And it took about the same time to perform a piece—depending on the conductor. There has been no productivity improvement. Yet, workers in other fields are infinitely more productive than they were in Mozart’s day. There is a similar problem in many other areas, mostly services where you really cannot improve productivity much (think barbers, teachers, doctors). The relative price of these things should have become insanely expensive over the past 200 years relative to, say, manufacturing output with tremendous productivity gains. And if we rewarded workers only for productivity gains, our musicians would still be working for Mozart era wages. It still takes one barber to keep one hundred heads of hair looking good. By contrast, a single farmer feeds as many hungry consumers as 100 farmers used to feed. But the farmer and barber still earn about the same living (give or take). Rather than vastly underpaying the farmer we choose to overpay the barber. At the same time, the Baumol disease thesis is that an ever growing portion of our nation’s output is in those sectors that suffer the disease. So we overpay ever more workers in those sectors. The trend for wages (and, thus, prices) is up.
(Wages grow faster than productivity because we have those low productivity sectors that get the same wage increases. And to carry the analysis a bit further, the thesis is that over time government tends to take over more of these “diseased” sectors—so government tends to grow as a percent of GDP. This is not meant to be a criticism, and of course there are countervailing tendencies. But think of healthcare and projected tens of trillions of dollars of government budget deficits and you’ve got the picture.)
Blame the concert violinist for erosion of the value of the dollar.
In a sense, a part of inflation is to even these things out—otherwise, all our musicians and artists would live like paupers relative to our factory workers. Think of it this way, inflation is the cost of preserving culture. Occasionally we like fine art, too. And we like our Kindergarten teachers to maintain class size of 15 kids. To keep pace with productivity growth in manufacturing, each Kindergarten teacher today would have to have hundreds of 5 years olds crowded into every classroom. It didn’t happen. (Well, with state and local government budget cuts, it might.)
To preserve “inefficiency” in the Kindergarten classroom we need inflation.
Sorry, that was rather long-winded, but the comment by Karl was on the right track.
Finally, as Neil hints, some inflation is probably good. Keynes argued it helps to encourage investment, by increasing nominal returns and making it easier to service debt. When I graduated from college with mountains of student loan debt, I really appreciated the Carter years’ inflation! The alternative would be rapidly declining prices in every sector that does not suffer from the Baumol disease—but deflation itself is a dangerous disease. This would be like fighting the common cold with a good dose of terminal cancer.
Q3: What about Chinese holding of Dollars—what is the impact on the US?
Answer: I want to hold off on this a bit, but clearly the Chinese do not really lend Dollars to the US and especially not to the US government. Every dollar they got came from us. Our problem is that we allow imports to displace US workers—we could put them to work in other jobs. But instead we leave a lot of them unemployed. We do not fully enjoy the advantages of running a trade deficit—consuming more than we produce—because we operate our economy below capacity and keep millions unemployed. But clearly the answer is not to go begging to the Chinese to keep those dollars flowing to the US (as VP Biden is doing right now)! Rather it is to put the unemployed to work doing useful things to improve our living standards.
Q4: Could use of gold be linked to anti-counterfeiting measures?
Answer: That sounds right to me! Yes, government could attempt to control gold supply making it harder to counterfeit coins.
Q5: What about the state of Utah accepting gold coins?
Answer: Heck, I’ll accept them, too. Send me yours! Worst case scenario is that gold prices will collapse and I’ll have to use the coins at nominal value. More likely, they will remain collector’s items.
I also like platinum: I’d like Treasury to coin ten $1 trillion dollar coins, and give me one. The other nine could buy back Treasuries so that our debt hysterians could worry about something else for a while.
Q6: Today, are there two "commodities" serving as medium of exchange, currency and demand deposits?
Answer: Neither are commodities. Sorry, we are using the word commodities in two senses. One is the Wall Street terminology: “natural resource” inputs to production: oil, soybeans, corn, copper, silver…and, yes, gold. These are now the subject of a speculative boom driven by pension funds buying futures contracts. The other is in the sense of “products of labor, produced for sale in markets”. But on neither definition is currency nor demand deposits an example of a “commodity”. Both are IOUs, either stamped on base metal or paper, or recorded electronically through keystrokes.
Q 7: In what sense does the state go into debt to the public when it issues money?
Answer: It must accept back its own IOUs. What it “owes” you is the right to redeem its IOU for the tax debt it imposed on you. Government “redeems” by accepting its own IOU. All debtors must accept back in payment their own IOUs. Even government. Refusal to accept is a default.
Q8: Were clipped coins accepted at original value?
Answer: Yes. And No. More on Gresham’s Law next week. Roman Law was nominalist as I discussed. Deviations from nominalism, however, were common in early modern society. But that does not make metalism correct. Read next week.
To finish up, a few more comments and responses:
Thanks much to Ramanan for providing citations to the St Augustine statement on Christ’s coins. I will update the blog. : St. Augustin on Sermon on the Mount, Harmony of the Gospels and Homilies on the Gospels: Nicene and Post-Nicene Fathers of the Christian Church, Part 6" (Sermon XL) ; Just above Sermon XLI here.
Alternatively; toward the end of the page: Christ's coin is man. In him is Christ's image, in him Christ's Name, Christ's gifts, Christ's rules of duty
A commentator noted: "People as coins" just might be a rabbinic allusion: "When Caesar puts his image on a thousand coins, they all look alike. But when God puts His image on a thousand people, they all come out different."
LRW: Thanks, I will look into this.
Dave said: People might find this of interest:
LRW: I agree! His view of money is similar to mine, I believe. In a word, debt.
Lewis, you appear to be channeling A. Mitchell Innes. Good job.
Darwin: yes, if you play by the rules on a gold standard, the quantity of gold constrains coin issue. You can call in gold, you can raise the price for gold paid at the mint, you can put less gold in your coins, and you can use hazelwood tally sticks and bar tabs. All of the above.
Anon Marx: I agree with you. Some Marxists do want to find commodity money in Marx. I do not. Marx’s whole analysis requires nominalism. I interpret his statements on gold as contingent—special cases having to do with operation of the gold standard.
Oil Drum Anon: “I think this particular installment of the MMP is weak…. Where is there an axiomatic development of MMT, uncluttered by asides about ancient history?
Answer: Well, Anonymous you’ve found the right site but you started in on #12. Begin at the Beginning. (Hint: they are numbered consecutively, so the beginning would be #1.) Further, many or even most people have this belief about commodity coins of the past, and believe that all would be right with the world if we only went back to coining gold. But that is an imaginary past. That is what I am trying to correct, since stories color our understanding. Indeed, our understanding really boils down to stories—it is how we sort things out. Humans are born story tellers. All of them are false, of course.
OK: done for today. Thanks for comments and questions. Part two next week. That will get more into the nitty and the gritty.
Thanks for all the responses—this might have been a record number for the MMP. Coins are fascinating. I have to admit that even though my approach downplays the role of coins in monetary systems, I always head right to the coin displays in the museums. Indeed, when in Cambridge recently I was treated to a quick tour of the collection of the late Phillip Grierson, who not only was among the greatest numismatists who ever lived but also one of those who recognized that the origins of money are not to be found in markets. Rather, it was his hypothesis that money came out of the penal system (debts again!)—a view that I believe must be correct. But that is a topic for another day.
Today I will address the first set of comments on the MMT approach to “commodity money coins”. In Blog 12 I began to explain why the MMT view is that gold or silver coins are not examples of commodity money. Rather, they are simply IOUs of the issuer that happen to be stamped on precious metal.
On to the comments and questions.
Q1: What is MMT’s view of the reserve currency?
Answer: Well, today it is the Dollar; a century ago it was the Pound. MMT principles apply—it is a sovereign currency issued through keystrokes. The issuer of the reserve currency can either float (in which case the issuer does not promise to convert at a fixed exchange rate) or it can fix. As I have argued, fixing reduces domestic policy space. Reserve status probably increases external demand for the nation’s currency—which is used for international clearing. To satisfy that demand, the reserve currency issuer (the US today) either supplies the currency through the capital account (lending) or the current account (trade deficit, for example).
Many believe this allows the nation that issues the reserve currency to “get something for nothing”, often called “seigniorage”. This is largely false—did American consumers get free goods and services over the past decade as the US ran current account deficits? No, of course not. They are left with a mountain of debt. Did the US government get “something for nothing”? Well, perhaps—but all sovereign governments can be said to get something for nothing, since they purchase by keystrokes.
But that is not seigniorage—it results from the fact that sovereign government imposes liabilities on its population--taxes, fees, and fines. The US does it; but so does Turkey. Sovereign government first puts its population in debt, then it uses keystrokes to move resources to the public sector and its keystrokes create its IOUs that provide the means through which taxpayers can retire their tax debt. The sovereign’s currency can circulate outside the country to varying degrees, but that is ultimately because the sovereign’s citizens need it to pay taxes domestically—since foreigners are not normally subject to the tax.
So in principle the issuer of the reserve currency is not unique—although the external demand for the reserve currency is greater. We’ll study this more later; think of this brief response as an appetizer that is no doubt going to spur some “hegemonic” objections!
Q2: The CPI has increased by a factor of 7 since 1966. Is the currency still a store of value?
Answer: Well, sure it is--but as the commentator noted, it is not a good store of value in terms of purchasing power of a basket of consumer goods and services over a period as long as a half century. We can quibble about the use of the CPI as a measure of inflation—it has well known problems we will not pursue in detail here.
As Keynes argued, you need some “stickiness” of wages and prices in the money of account—or you might abandon money. That is what can happen in a hyperinflation. You try to find something else. But clearly except for a few gold bugs, US inflation since 1966 has been sufficiently low that the Dollar remained a useful money of account, and currency has been voluntarily held.
In truth, economists are hard-pressed to find negative economic effects from inflation at rates under, say, 40% per year. But clearly people do not like inflation when it gets to double digits.
Returning to Keynes, he said that no one would hold money as a store of value in the absence of uncertainty. Holding wealth in a highly liquid form like money makes sense only if you are uncertain, and even scared, about the future. In a financial crisis, everyone runs to cash. It gives a very low return, but that is better than a huge loss!
If you wanted a good store of wealth, and you were making a decision back in 1966 as to the portfolio you would hold until 2011, it is unlikely that you would have held much cash. There would have been many assets that would be better stores of value. However, if we are talking about a desirable portfolio to be held over the next few months, you probably would hold some cash. There is a trade-off between liquidity and return.
I know the gold bugs like gold; but those who bought it in 1980 were kicking themselves for the next 30 years, and still have not recouped their losses. In general, commodity prices fall over time in real terms—they are terrible inflation hedges—plus they have storage costs.
Let me just say I have no knowledge of Dungeons and Dragons—I suppose it is a board game like Monopoly--so I cannot answer Neil’s question about gold, silver, and copper pieces. But I think Monopoly still uses the same paper currency and same prices and rents? Not sure what the question is. Games don’t have to have inflation? OK—games have rules. I suppose inflation is not built into the rules of those games.
On Karl’s statement that past labor is not equivalent to today’s labor, hence, it is not surprising that wages and prices are higher today, I do believe he is onto a point.
We must adjust the CPI or other measures of price for quality improvements. How much would a modern laptop have cost in 1966? Millions of dollars? Billions? As Warren Mosler always jokes, your IPhone has more electronic wizardry than NASA was able to muster for the trips to the moon. The CPI is more of an art than a science—since we have to put prices on things that did not exist, and make imaginary quality adjustments.
Further there is something called the Baumol disease. A symphony orchestra back in Mozart’s time was as large as one today—give or take a few. And it took about the same time to perform a piece—depending on the conductor. There has been no productivity improvement. Yet, workers in other fields are infinitely more productive than they were in Mozart’s day. There is a similar problem in many other areas, mostly services where you really cannot improve productivity much (think barbers, teachers, doctors). The relative price of these things should have become insanely expensive over the past 200 years relative to, say, manufacturing output with tremendous productivity gains. And if we rewarded workers only for productivity gains, our musicians would still be working for Mozart era wages. It still takes one barber to keep one hundred heads of hair looking good. By contrast, a single farmer feeds as many hungry consumers as 100 farmers used to feed. But the farmer and barber still earn about the same living (give or take). Rather than vastly underpaying the farmer we choose to overpay the barber. At the same time, the Baumol disease thesis is that an ever growing portion of our nation’s output is in those sectors that suffer the disease. So we overpay ever more workers in those sectors. The trend for wages (and, thus, prices) is up.
(Wages grow faster than productivity because we have those low productivity sectors that get the same wage increases. And to carry the analysis a bit further, the thesis is that over time government tends to take over more of these “diseased” sectors—so government tends to grow as a percent of GDP. This is not meant to be a criticism, and of course there are countervailing tendencies. But think of healthcare and projected tens of trillions of dollars of government budget deficits and you’ve got the picture.)
Blame the concert violinist for erosion of the value of the dollar.
In a sense, a part of inflation is to even these things out—otherwise, all our musicians and artists would live like paupers relative to our factory workers. Think of it this way, inflation is the cost of preserving culture. Occasionally we like fine art, too. And we like our Kindergarten teachers to maintain class size of 15 kids. To keep pace with productivity growth in manufacturing, each Kindergarten teacher today would have to have hundreds of 5 years olds crowded into every classroom. It didn’t happen. (Well, with state and local government budget cuts, it might.)
To preserve “inefficiency” in the Kindergarten classroom we need inflation.
Sorry, that was rather long-winded, but the comment by Karl was on the right track.
Finally, as Neil hints, some inflation is probably good. Keynes argued it helps to encourage investment, by increasing nominal returns and making it easier to service debt. When I graduated from college with mountains of student loan debt, I really appreciated the Carter years’ inflation! The alternative would be rapidly declining prices in every sector that does not suffer from the Baumol disease—but deflation itself is a dangerous disease. This would be like fighting the common cold with a good dose of terminal cancer.
Q3: What about Chinese holding of Dollars—what is the impact on the US?
Answer: I want to hold off on this a bit, but clearly the Chinese do not really lend Dollars to the US and especially not to the US government. Every dollar they got came from us. Our problem is that we allow imports to displace US workers—we could put them to work in other jobs. But instead we leave a lot of them unemployed. We do not fully enjoy the advantages of running a trade deficit—consuming more than we produce—because we operate our economy below capacity and keep millions unemployed. But clearly the answer is not to go begging to the Chinese to keep those dollars flowing to the US (as VP Biden is doing right now)! Rather it is to put the unemployed to work doing useful things to improve our living standards.
Q4: Could use of gold be linked to anti-counterfeiting measures?
Answer: That sounds right to me! Yes, government could attempt to control gold supply making it harder to counterfeit coins.
Q5: What about the state of Utah accepting gold coins?
Answer: Heck, I’ll accept them, too. Send me yours! Worst case scenario is that gold prices will collapse and I’ll have to use the coins at nominal value. More likely, they will remain collector’s items.
I also like platinum: I’d like Treasury to coin ten $1 trillion dollar coins, and give me one. The other nine could buy back Treasuries so that our debt hysterians could worry about something else for a while.
Q6: Today, are there two "commodities" serving as medium of exchange, currency and demand deposits?
Answer: Neither are commodities. Sorry, we are using the word commodities in two senses. One is the Wall Street terminology: “natural resource” inputs to production: oil, soybeans, corn, copper, silver…and, yes, gold. These are now the subject of a speculative boom driven by pension funds buying futures contracts. The other is in the sense of “products of labor, produced for sale in markets”. But on neither definition is currency nor demand deposits an example of a “commodity”. Both are IOUs, either stamped on base metal or paper, or recorded electronically through keystrokes.
Q 7: In what sense does the state go into debt to the public when it issues money?
Answer: It must accept back its own IOUs. What it “owes” you is the right to redeem its IOU for the tax debt it imposed on you. Government “redeems” by accepting its own IOU. All debtors must accept back in payment their own IOUs. Even government. Refusal to accept is a default.
Q8: Were clipped coins accepted at original value?
Answer: Yes. And No. More on Gresham’s Law next week. Roman Law was nominalist as I discussed. Deviations from nominalism, however, were common in early modern society. But that does not make metalism correct. Read next week.
To finish up, a few more comments and responses:
Thanks much to Ramanan for providing citations to the St Augustine statement on Christ’s coins. I will update the blog. : St. Augustin on Sermon on the Mount, Harmony of the Gospels and Homilies on the Gospels: Nicene and Post-Nicene Fathers of the Christian Church, Part 6" (Sermon XL) ; Just above Sermon XLI here.
Alternatively; toward the end of the page: Christ's coin is man. In him is Christ's image, in him Christ's Name, Christ's gifts, Christ's rules of duty
A commentator noted: "People as coins" just might be a rabbinic allusion: "When Caesar puts his image on a thousand coins, they all look alike. But when God puts His image on a thousand people, they all come out different."
LRW: Thanks, I will look into this.
Dave said: People might find this of interest:
LRW: I agree! His view of money is similar to mine, I believe. In a word, debt.
Lewis, you appear to be channeling A. Mitchell Innes. Good job.
Darwin: yes, if you play by the rules on a gold standard, the quantity of gold constrains coin issue. You can call in gold, you can raise the price for gold paid at the mint, you can put less gold in your coins, and you can use hazelwood tally sticks and bar tabs. All of the above.
Anon Marx: I agree with you. Some Marxists do want to find commodity money in Marx. I do not. Marx’s whole analysis requires nominalism. I interpret his statements on gold as contingent—special cases having to do with operation of the gold standard.
Oil Drum Anon: “I think this particular installment of the MMP is weak…. Where is there an axiomatic development of MMT, uncluttered by asides about ancient history?
Answer: Well, Anonymous you’ve found the right site but you started in on #12. Begin at the Beginning. (Hint: they are numbered consecutively, so the beginning would be #1.) Further, many or even most people have this belief about commodity coins of the past, and believe that all would be right with the world if we only went back to coining gold. But that is an imaginary past. That is what I am trying to correct, since stories color our understanding. Indeed, our understanding really boils down to stories—it is how we sort things out. Humans are born story tellers. All of them are false, of course.
OK: done for today. Thanks for comments and questions. Part two next week. That will get more into the nitty and the gritty.
Wednesday, August 24, 2011
Jackson Hole will be a Black Hole for Those Hoping for QE3
By Marshall Auerback and Rob Parenteau
Those leading the charge for “fiscal consolidation” now seem positively shocked by the violent gyrations in the stock market, as expectations rapidly seem to be shifting toward an “L” shaped recovery or worse – a possible global recession. To those of us on this blog who have consistently downplayed the prospects of global recovery in the midst of widespread private sector AND public sector retrenchment, none of this sadly comes as a surprise. We are, as Bill Mitchell noted recently, experiencing a “self-inflicted catastrophe”, largely because of dangerously destructive myths in regard to the efficacy (or lack of it) in regard to fiscal policy. But in spite of the shrill rhetoric of the fiscal austerian brigades, the markets are beginning to intuit that a nation cannot have a fiscal contraction expansion when all other spending is flat or going backwards and yet that remains the general trajectory of policy.
Tuesday, August 23, 2011
Mark Steyn’s Ode to Criminogenic Environments
By William K. Black
(Cross-posted from Benzinga.com)
This column was prompted by listening to Mark Steyn (an ultra right writer) giving a C-SPAN talk on his new book that asserts that America has destroyed itself and will be superseded soon by China. Steyn is best known for his fear of a Muslim takeover of Europe. (During the C-SPAN talk he warned that the “Mullahs of Dearborn” had created “Michiganistan.” I grew up in Dearborn, Michigan, so perhaps I am agent of this dread conspiracy that has subjugated one of our states – and cleverly disguised its takeover by radical Islamic agents by electing conservative Republicans to run the state.)
Steyn’s contradictory concerns are that the United States government borrows too much money and spends too little on the military and too much on education. (He opines that university educations are a “waste” for “most” college students. Again, I may be an agent of this evil conspiracy to educate our kids.) He was a strong supporter of our recent invasions. He expressed his distress that the U.S. military was not leading the war in Libya. Under Steyn’s view of how financial systems work, those invasions were financed primarily by issuing large amounts of debt and were major contributors to what he terms a “debt catastrophe.” Indeed, he emphasizes his support for the massive amount of money that the U.S. spends on its military even when we are not a war – roughly the same amount as the rest of the world combined. He also claims that Western Europe is able to fund its generous social programs because they are “free riders” on the U.S. military. In other words, he argues that military spending limits U.S. growth and increases Treasury debt – and we should expand our spending and our invasions. His views are logically incoherent.
(Cross-posted from Benzinga.com)
This column was prompted by listening to Mark Steyn (an ultra right writer) giving a C-SPAN talk on his new book that asserts that America has destroyed itself and will be superseded soon by China. Steyn is best known for his fear of a Muslim takeover of Europe. (During the C-SPAN talk he warned that the “Mullahs of Dearborn” had created “Michiganistan.” I grew up in Dearborn, Michigan, so perhaps I am agent of this dread conspiracy that has subjugated one of our states – and cleverly disguised its takeover by radical Islamic agents by electing conservative Republicans to run the state.)
Steyn’s contradictory concerns are that the United States government borrows too much money and spends too little on the military and too much on education. (He opines that university educations are a “waste” for “most” college students. Again, I may be an agent of this evil conspiracy to educate our kids.) He was a strong supporter of our recent invasions. He expressed his distress that the U.S. military was not leading the war in Libya. Under Steyn’s view of how financial systems work, those invasions were financed primarily by issuing large amounts of debt and were major contributors to what he terms a “debt catastrophe.” Indeed, he emphasizes his support for the massive amount of money that the U.S. spends on its military even when we are not a war – roughly the same amount as the rest of the world combined. He also claims that Western Europe is able to fund its generous social programs because they are “free riders” on the U.S. military. In other words, he argues that military spending limits U.S. growth and increases Treasury debt – and we should expand our spending and our invasions. His views are logically incoherent.
Monday, August 22, 2011
Today's Modern Money Primer
Wray begins to dispel the view that coins used to be commodity money. Head over to the primer to read the latest in the MMP series: Commodity Money Coins? Metalism vs. Nominalism, Part 1
Monday, August 22, 2011
Michael Hudson on the State and Local Budget Crisis
The State and Local Budget Crisis
The cost of the 2011 cutbacks in federal spending will fall most directly on consumers and retirees by scaling back Social Security, Medicare, Medicaid and social spending programs. The population also will suffer indirectly, by lower federal revenue sharing with U.S. states and cities. The following chart from the National Income and Product Accounts (NIPA, Table 3.3) shows how federal financial aid has helped cities shift the tax burden off real estate, although the main shift has been off property taxes onto income – and onto consumption (sales) taxes.
 |
| State and Local revenue, 1930-2007 |
Untaxing real estate has served mortgage bankers by freeing more rental income (the land’s site value) to be paid as interest. Property taxes have not absorbed anywhere near the rise in debt-leveraged housing and commercial prices. However, this has not lowered the cost of housing for most people. New buyers must pay a price that capitalizes the property’s rental value. Less and less of this payment has taken the form of local property taxes. More and more has been paid to mortgage lenders as interest. So cutting property taxes has simply left more revenue to be capitalized into higher debt-financed prices.
Monday, August 22, 2011
MMP BLOG #12: COMMODITY MONEY COINS? METALISM VS. NOMINALISM, PART ONE
By L. Randall Wray
Last week I asserted that coins have never been a form of commodity money; rather they have always been the IOUs of the issuer. Essentially, a gold coin is just the state’s IOU that happens to have been stamped on gold. It is just a “token” of the state’s indebtedness—nothing but a record of that debt. The state must take back its IOU in payments made to itself. “Taxes drive money”—these “money things” are accepted because there are taxes “backing them up”, not because they have embodied gold. As promised, this week I will begin try to dispel the view that coins used to be commodity monies. Next week, we will finish up the discussion.
In this Primer I do not want to go deeply into economic history—we are more interested here with how money “works” today. However, that does not mean that history does not matter, nor should we ignore how our stories about the past affect how we view money today. For example, a common belief (accepted by most economists) is that money first took a commodity form. Our ancient ancestors had markets, but they relied on inconvenient barter until someone had the bright idea of choosing one commodity to act as a medium of exchange. At first it might have been pretty sea shells, but through some sort of evolutionary process, precious metals were chosen as a more efficient money commodity.
Obviously, metal had an intrinsic value—it was desired for other uses. (And if we take a Marxian labor theory of value, we can say metal had a labor value as it had to be mined and refined.) Whatever the case, that intrinsic value imparted value to coined metal. This helped to prevent inflation—that is, decline in the purchasing power of the metal coin in terms of other commodities—since the coin could always be melted and sold as bullion. There are then all sorts of stories about how government debased the value of the coins (by reducing precious metal content), causing inflation.
Later, government issued paper money (or base metal coins of very little intrinsic value) but promised to redeem this for the metal. Again, there are many stories about government defaulting on that. And then finally we end with today’s “fiat money”, with nothing “real” standing behind it. And that is how we get the Weimar Republics and the Zimbabwes—with nothing really backing the money it now is prone to causing hyperinflation as government prints up too much of it. Which leads us to the gold bug’s lament: if only we could go back to a “real” money standard: gold.
In this discussion, we cannot provide a detailed historical account to debunk the traditional stories about money’s history. Let us instead provide an overview of an alternative.
First we need to note that the money of account is many thousands of years old—at least four millennia old and probably much older. (The “modern” in “modern money theory” comes from Keynes’s claim that money has been state money for the past 4000 years “at least”.) We know this because we have, for example, the clay tablets of Mesopotamia that record values in money terms, along with price lists in that money of account.
We also know that money’s earliest origins are closely linked to debts and record-keeping, and that many of the words associated with money and debt have religious significance: debt, sin, repayment, redemption, “wiping the slate clean”, and Year of Jubilee. In the Aramaic language spoken by Christ, the word for “debt” is the same as the word for “sin”. The “Lord’s Prayer” that is normally interpreted to read “forgive us our trespasses” could be just as well translated as “our debts” or “our sins”—or as Margaret Atwood says, “our sinful debts”.*
Records of credits and debits were more akin to modern electronic entries—etched in clay rather than on computer tapes. And all early money units had names derived from measures of the principal grain foodstuff—how many bushels of barley equivalent were owed, owned, and paid. All of this is more consistent with the view of money as a unit of account, a representation of social value, and an IOU rather than as a commodity.
Or, as we MMTers say, money is a “token”, like the cloakroom “ticket” that can be redeemed for one’s coat at the end of the operatic performance.
Indeed, the “pawn” in pawnshop comes from the word for “pledge”, as in the collateral left, with a token IOU provided by the shop that is later “redeemed” for the item left. St. Nick is the patron saint of pawnshops (and, appropriately, for thieves), while “Old Nick” refers to the devil (hence, the red suit and chimney soot) to whom we pawn our souls. The Tenth Commandment’s prohibition on coveting thy neighbor’s wife (which goes on to include male or female slave, or ox, or donkey, or anything that belongs to your neighbor) has nothing to do with sex and adultery but rather with receiving them as pawns for debt. By contrast, Christ is known as “the Redeemer”—the “Sin Eater” who steps forward to pay the debts we cannot redeem, a much older tradition that lay behind the practice of human sacrifice to repay the gods.*
We all know Shakespeare’s admonition “neither a borrower nor a lender be”, as religion typically views both the “devil” creditor and the debtor who “sells his soul” by pawning his wife and kids into debt bondage as sinful—if not equally then at least simultaneously tainted, united in the awful bondage. Only “redemption” can free us from humanity’s debts owing to Eve’s original sin.
Of course, for most of humanity today, it is the original sin/debt to the tax collector, rather than to Old Nick, that we cannot escape. The Devil kept the first account book, carefully noting the purchased souls and only death could “wipe the slate clean” as “death pays all debts”. Now we’ve got our tax collector, who like death is the only certain thing in life. In between the two, we had the clay tablets of Mesopotamia recording debits and credits in the Temple’s and then the Palace’s money of account for the first few millennia after money was invented as a universal measure of our multiple and heterogeneous sins.
The first coins were created thousands of years later, in the greater Greek region (so far as we know, in Lydia in the 7th century BC). And in spite of all that has been written about coins, they have rarely been more than a very small proportion of the “money things” involved in finance and debt payment. For most of European history, for example, tally sticks, bills of exchange, and “bar tabs” (again, the reference to “wiping the slate clean” is revealing—something that might not be done for a year or two at the pub, where the alewife kept the accounts) did most of that work.
Indeed, until very recent times, most payments made to the Crown in England were in the form of tally sticks (the King’s own IOU, recorded in the form of notches in hazelwood)—whose use was only discontinued well into the 19th century (with a catastrophic result: the Exchequer had them thrown into the stoves with such zest that Parliament was burnt to the ground by those devilish tax collectors!) In most realms, the quantity of coin was so small that it could be (and was) frequently called in to be melted for re-coinage.
(If you think about it, calling in all the coins to melt them for re-coinage would be a very strange and pointless activity if coins were already valued by embodied metal!)
So what were coins and why did they contain precious metal? To be sure, we do not know. Money’s history is “lost in the mists of time when the ice was melting…when the weather was delightful and the mind free to be fertile of new ideas—in the islands of the Hesperides or Atlantis or some Eden of Central Asia” as Keynes put it. We have to speculate.
One hypothesis about early Greece (the mother of both democracy and coinage—almost certainly the two are linked in some manner) is that the elites had nearly monopolized precious metal, which was important in their social circles tied together by “hierarchical gift exchange”. They were above the agora (market place) and hostile to the rising polis (democratic city-state government). According to Classical scholar Leslie Kurke, the polis first minted coin to be used in the agora to “represent the state’s assertion of its ultimate authority to constitute and regulate value in all the spheres in which general-purpose money operated… Thus state-issued coinage as a universal equivalent, like the civic agora in which it circulated, symbolized the merger in a single token or site of many different domains of value, all under the final authority of the city.”** The use of precious metals was a conscious thumbing-of-the-nose against the elite who placed great ceremonial value on precious metal. By coining their precious metal, for use in the agora’s houses of prostitution by mere common citizens, the polis sullied the elite’s hierarchical gift exchange—appropriating precious metal, and with its stamp asserting its ultimate authority.
As the polis used coins for its own payments and insisted on payment in coin, it inserted its sovereignty into retail trade in the agora. At the same time, the agora and its use of coined money subverted hierarchies of gift exchange, just as a shift to taxes and regular payments to city officials (as well as severe penalties levied on officials who accepted gifts) challenged the "natural" order that relied on gifts and favors. As Kurke argues, since coins are nothing more than tokens of the city’s authority, they could have been produced from any material. However, because the aristocrats measured a man’s worth by the quantity and quality of the precious metal he had accumulated, the polis was required to mint high quality coins, unvarying in fineness. (Note that gold is called the noble metal because it remains the same through time, like the king; coined metal needed to be similarly unvarying.) The citizens of the polis by their association with high quality, uniform, coin (and in the literary texts of the time, the citizen’s "mettle" was tested by the quality of the coin issued by his city) gained equal status; by providing a standard measure of value, coinage rendered labor comparable and in this sense coinage was an egalitarian innovation.
From that time forward, coins commonly contained precious metal. Rome carried on the tradition, and Kurke’s thesis is consistent with the statement of St. Augustine, who declared that just as people are Christ’s coins, the precious metal coins of Rome represent a visualization of imperial power—inexorably doing the emperor’s bidding just as the reverent do Christ’s.*** Note, again, the link between money and religion.
OK that gets us to Roman times. Next week we examine coinage from Rome through to modern times.
References:
*Payback: debt and the shadow side of wealth, by Margaret Atwood, Anansi 2008.
**Coins, Bodies, Games, and Gold, by Leslie Kurke, Princeton University Press, Princeton, New Jersey, 1999; xxi, 385; paper $29.95 (ISBN 0-691-00736-5), cloth $65.00 (ISBN 0-691-01731-X).
***If anyone knows the source for St. Augustine’s comparison of people to coins, please provide it. I thank Chris Desan, David Fox, and other participants of a recent seminar at Cambridge University for the discussion I draw upon here.
Last week I asserted that coins have never been a form of commodity money; rather they have always been the IOUs of the issuer. Essentially, a gold coin is just the state’s IOU that happens to have been stamped on gold. It is just a “token” of the state’s indebtedness—nothing but a record of that debt. The state must take back its IOU in payments made to itself. “Taxes drive money”—these “money things” are accepted because there are taxes “backing them up”, not because they have embodied gold. As promised, this week I will begin try to dispel the view that coins used to be commodity monies. Next week, we will finish up the discussion.
In this Primer I do not want to go deeply into economic history—we are more interested here with how money “works” today. However, that does not mean that history does not matter, nor should we ignore how our stories about the past affect how we view money today. For example, a common belief (accepted by most economists) is that money first took a commodity form. Our ancient ancestors had markets, but they relied on inconvenient barter until someone had the bright idea of choosing one commodity to act as a medium of exchange. At first it might have been pretty sea shells, but through some sort of evolutionary process, precious metals were chosen as a more efficient money commodity.
Obviously, metal had an intrinsic value—it was desired for other uses. (And if we take a Marxian labor theory of value, we can say metal had a labor value as it had to be mined and refined.) Whatever the case, that intrinsic value imparted value to coined metal. This helped to prevent inflation—that is, decline in the purchasing power of the metal coin in terms of other commodities—since the coin could always be melted and sold as bullion. There are then all sorts of stories about how government debased the value of the coins (by reducing precious metal content), causing inflation.
Later, government issued paper money (or base metal coins of very little intrinsic value) but promised to redeem this for the metal. Again, there are many stories about government defaulting on that. And then finally we end with today’s “fiat money”, with nothing “real” standing behind it. And that is how we get the Weimar Republics and the Zimbabwes—with nothing really backing the money it now is prone to causing hyperinflation as government prints up too much of it. Which leads us to the gold bug’s lament: if only we could go back to a “real” money standard: gold.
In this discussion, we cannot provide a detailed historical account to debunk the traditional stories about money’s history. Let us instead provide an overview of an alternative.
First we need to note that the money of account is many thousands of years old—at least four millennia old and probably much older. (The “modern” in “modern money theory” comes from Keynes’s claim that money has been state money for the past 4000 years “at least”.) We know this because we have, for example, the clay tablets of Mesopotamia that record values in money terms, along with price lists in that money of account.
We also know that money’s earliest origins are closely linked to debts and record-keeping, and that many of the words associated with money and debt have religious significance: debt, sin, repayment, redemption, “wiping the slate clean”, and Year of Jubilee. In the Aramaic language spoken by Christ, the word for “debt” is the same as the word for “sin”. The “Lord’s Prayer” that is normally interpreted to read “forgive us our trespasses” could be just as well translated as “our debts” or “our sins”—or as Margaret Atwood says, “our sinful debts”.*
Records of credits and debits were more akin to modern electronic entries—etched in clay rather than on computer tapes. And all early money units had names derived from measures of the principal grain foodstuff—how many bushels of barley equivalent were owed, owned, and paid. All of this is more consistent with the view of money as a unit of account, a representation of social value, and an IOU rather than as a commodity.
Or, as we MMTers say, money is a “token”, like the cloakroom “ticket” that can be redeemed for one’s coat at the end of the operatic performance.
Indeed, the “pawn” in pawnshop comes from the word for “pledge”, as in the collateral left, with a token IOU provided by the shop that is later “redeemed” for the item left. St. Nick is the patron saint of pawnshops (and, appropriately, for thieves), while “Old Nick” refers to the devil (hence, the red suit and chimney soot) to whom we pawn our souls. The Tenth Commandment’s prohibition on coveting thy neighbor’s wife (which goes on to include male or female slave, or ox, or donkey, or anything that belongs to your neighbor) has nothing to do with sex and adultery but rather with receiving them as pawns for debt. By contrast, Christ is known as “the Redeemer”—the “Sin Eater” who steps forward to pay the debts we cannot redeem, a much older tradition that lay behind the practice of human sacrifice to repay the gods.*
We all know Shakespeare’s admonition “neither a borrower nor a lender be”, as religion typically views both the “devil” creditor and the debtor who “sells his soul” by pawning his wife and kids into debt bondage as sinful—if not equally then at least simultaneously tainted, united in the awful bondage. Only “redemption” can free us from humanity’s debts owing to Eve’s original sin.
Of course, for most of humanity today, it is the original sin/debt to the tax collector, rather than to Old Nick, that we cannot escape. The Devil kept the first account book, carefully noting the purchased souls and only death could “wipe the slate clean” as “death pays all debts”. Now we’ve got our tax collector, who like death is the only certain thing in life. In between the two, we had the clay tablets of Mesopotamia recording debits and credits in the Temple’s and then the Palace’s money of account for the first few millennia after money was invented as a universal measure of our multiple and heterogeneous sins.
The first coins were created thousands of years later, in the greater Greek region (so far as we know, in Lydia in the 7th century BC). And in spite of all that has been written about coins, they have rarely been more than a very small proportion of the “money things” involved in finance and debt payment. For most of European history, for example, tally sticks, bills of exchange, and “bar tabs” (again, the reference to “wiping the slate clean” is revealing—something that might not be done for a year or two at the pub, where the alewife kept the accounts) did most of that work.
Indeed, until very recent times, most payments made to the Crown in England were in the form of tally sticks (the King’s own IOU, recorded in the form of notches in hazelwood)—whose use was only discontinued well into the 19th century (with a catastrophic result: the Exchequer had them thrown into the stoves with such zest that Parliament was burnt to the ground by those devilish tax collectors!) In most realms, the quantity of coin was so small that it could be (and was) frequently called in to be melted for re-coinage.
(If you think about it, calling in all the coins to melt them for re-coinage would be a very strange and pointless activity if coins were already valued by embodied metal!)
So what were coins and why did they contain precious metal? To be sure, we do not know. Money’s history is “lost in the mists of time when the ice was melting…when the weather was delightful and the mind free to be fertile of new ideas—in the islands of the Hesperides or Atlantis or some Eden of Central Asia” as Keynes put it. We have to speculate.
One hypothesis about early Greece (the mother of both democracy and coinage—almost certainly the two are linked in some manner) is that the elites had nearly monopolized precious metal, which was important in their social circles tied together by “hierarchical gift exchange”. They were above the agora (market place) and hostile to the rising polis (democratic city-state government). According to Classical scholar Leslie Kurke, the polis first minted coin to be used in the agora to “represent the state’s assertion of its ultimate authority to constitute and regulate value in all the spheres in which general-purpose money operated… Thus state-issued coinage as a universal equivalent, like the civic agora in which it circulated, symbolized the merger in a single token or site of many different domains of value, all under the final authority of the city.”** The use of precious metals was a conscious thumbing-of-the-nose against the elite who placed great ceremonial value on precious metal. By coining their precious metal, for use in the agora’s houses of prostitution by mere common citizens, the polis sullied the elite’s hierarchical gift exchange—appropriating precious metal, and with its stamp asserting its ultimate authority.
As the polis used coins for its own payments and insisted on payment in coin, it inserted its sovereignty into retail trade in the agora. At the same time, the agora and its use of coined money subverted hierarchies of gift exchange, just as a shift to taxes and regular payments to city officials (as well as severe penalties levied on officials who accepted gifts) challenged the "natural" order that relied on gifts and favors. As Kurke argues, since coins are nothing more than tokens of the city’s authority, they could have been produced from any material. However, because the aristocrats measured a man’s worth by the quantity and quality of the precious metal he had accumulated, the polis was required to mint high quality coins, unvarying in fineness. (Note that gold is called the noble metal because it remains the same through time, like the king; coined metal needed to be similarly unvarying.) The citizens of the polis by their association with high quality, uniform, coin (and in the literary texts of the time, the citizen’s "mettle" was tested by the quality of the coin issued by his city) gained equal status; by providing a standard measure of value, coinage rendered labor comparable and in this sense coinage was an egalitarian innovation.
From that time forward, coins commonly contained precious metal. Rome carried on the tradition, and Kurke’s thesis is consistent with the statement of St. Augustine, who declared that just as people are Christ’s coins, the precious metal coins of Rome represent a visualization of imperial power—inexorably doing the emperor’s bidding just as the reverent do Christ’s.*** Note, again, the link between money and religion.
OK that gets us to Roman times. Next week we examine coinage from Rome through to modern times.
References:
*Payback: debt and the shadow side of wealth, by Margaret Atwood, Anansi 2008.
**Coins, Bodies, Games, and Gold, by Leslie Kurke, Princeton University Press, Princeton, New Jersey, 1999; xxi, 385; paper $29.95 (ISBN 0-691-00736-5), cloth $65.00 (ISBN 0-691-01731-X).
***If anyone knows the source for St. Augustine’s comparison of people to coins, please provide it. I thank Chris Desan, David Fox, and other participants of a recent seminar at Cambridge University for the discussion I draw upon here.
Friday, August 19, 2011
NPR's Robert Siegel Interviews William K. Black on the Investigation of S&P
Listen to William Black explain how investigations into the recent financial crisis differ from inquiries into previous disasters. Also, you'll find Professor Black's review of Guaranteed to Fail: Fannie Mae, Freddie Mac, and the Debacle of Mortgage Finance below the fold.
Friday, August 19, 2011
The Case Against the Ratings Agencies
By Michael Hudson
(Cross-posted from Counterpunch.org)
(Cross-posted from Counterpunch.org)
In today’s looming confrontation the ratings agencies are playing the political role of “enforcer” as the gatekeepers to credit, to put pressure on Iceland, Greece and even the United States to pursue creditor-oriented policies that lead inevitably to financial crises. These crises in turn force debtor governments to sell off their assets under distress conditions. In pursuing this guard-dog service to the world’s bankers, the ratings agencies are escalating a political strategy they have long been refined over a generation in the corrupt arena of local U.S. politics.
Why ratings agencies use public selloffs rather than sound tax policy: The Kucinich Case Study
In 1936, as part of the New Deal’s reform of America’s financial markets, regulators forbid banks and institutional money managers to buy securities deemed “speculative” by “recognized rating manuals.” Insurance companies, pension funds and mutual funds subject to public regulation are required to “take into account” the views of the credit ratings agencies, providing them with a government-sanctioned monopoly. These agencies make their money by offering their “opinions” (for which they have never been legally liable) as to the payment prospects of various grades of security, from AAA (as secure government debt, the top rating because governments always can print the money to pay) down to various depths of junk.
Moody’s, Standard and Poor’s and Fitch focus mainly on stocks and on corporate, state and local bond issues. They make money twice off the same transaction when cities and states balance their budgets by spinning off public enterprises into new corporate entities issuing new bonds and stocks. This business incentive gives the ratings agencies an antipathy to governments that finance themselves on a pay-as-you-go basis (as Adam Smith endorsed) by raising taxes on real estate and other property, income or sales taxes instead of borrowing to cover their spending. The effect of this inherent bias is not to give an opinion about what is economically best for a locality, but rather what makes the most profit for themselves.
Thursday, August 18, 2011
ARE WE APPROACHING THE ENDGAME FOR THE EURO?
By Marshall Auerback
Forget about the S&P downgrade, which has had ZERO impact on the global equity markets. The downgrade was supposed to mean that it would be more likely that the US government would not be able to pay its debt than previously assumed. IF the markets took this warning seriously, then they would have attached a higher risk premium to US government bonds. Of course, the opposite occurred. US bonds soared in price. In other words, investors, both here and abroad, voted with money as loudly as possible that they view the US government debt as a very safe haven in a time of financial turmoil
So if it wasn’t the S&P downgrade which caused this downward cascade in the global equity markets, then what was it? By far, the most important factor currently driving the market’s bear trends is Europe or, more specifically, the future of the euro and the European Monetary Union. Systemic risk has migrated across the Atlantic to the euro zone.
Rather than attempting to stave off a double-dip recession by easing fiscal and monetary policy, the European Central Bank (ECB) has gone careening off in the opposite direction. The euro project is consequently being turned into a Hooverian instrument of economic torture from sado-monetarists, such as Jean-Claude Trichet, who see each bailout as a way for irresponsible nations to offload their liabilities onto their fitter neighbors, rather than considering the flawed institutional structures which created the need for these stop-gap measures in the first place. Interest rates have been raised, and member states have been forced into self-defeating austerity programmes which, by destroying growth, have made underlying debt dynamics even worse. It is hard to imagine a more tragic and self-defeating type of policy mix. It is 1937 writ large.
Thursday, August 18, 2011
MMT AND ALTERNATIVE EXCHANGE RATE REGIMES: RESPONSES TO MMP BLOG #11
Thanks for comments. Let me stick to the topic: MMT and alternative exchange rate regimes. At one end we have fixed exchange rates—with the currency pegged to gold or to a foreign currency. At the other we have floating rates. No one seemed to question my (obvious) claim that floating rates provide more domestic policy space, in general. Other than that, what are the advantages and disadvantages?
Well the belief is that fixed rates provide more certainty—you know what the dollar will be worth relative to the pound. That makes it easier to write (nonhedged) contracts. However, the uncertainty is shifted to the ability of government to maintain the peg. That is especially problematic in the post-Bretton Woods era in which countries that peg are essentially “going it alone”.
Many also (paradoxically) believe that fixed exchange rates reduce the chance of speculative attacks. That is counterfactual as well as counterintuitive. Remember the pound? George Soros brought it down and supposedly made a billion dollars in a day betting the UK could not defend the fix. Would you rather short a currency that is fixed, or one that floats minute by minute? In which of those two cases could you make a billion a day? Would you rather try to hit a moving target, or one that is stationary?
Now it is true that daily fluctuation of pegged rates might be nil for long periods of time, in contrast to floating rates that might vary all the time. But when pegged rates do move, they can generate currency crises because when the peg is broken, that is equivalent to a default. If I promise to you to convert my dollar IOUs to a foreign currency (or gold) at a fixed rate, and then I tell you that I’ll only give you half the promised amount of foreign currency, I have just defaulted. That causes havoc in markets.
So, yes, fixed rates can in some cases provide greater certainty—until they are abandoned. To ensure the fixed rate will be maintained, the country will need access to substantial foreign currency reserves. A country like China or Taiwan today can provide a believable promise of conversion at fixed exchange rates. Most nations cannot.
How do these countries obtain the foreign exchange reserves? For the most part, they run current account surpluses (selling goods and services abroad, or earning factor incomes in foreign currency) or they borrow them. How do those reserves end up at government? Because the exporters who earn—let us say—US Dollars need to cover their own domestic expenses in the domestic currency. The central bank offers exchange services to its banks—they need domestic currency reserves. The central bank creates domestic currency reserves and buys the foreign currency reserves. The central bank then typically exchanges Dollar reserves at the Fed for Treasuries. It wants to earn interest. That is why there is a very close link between US current account deficits and foreign accumulation of Treasuries. It is not that foreigners are “lending” to the US government so that it can deficit spend. Rather, the US current account allows foreigners to earn Dollars, and they want to earn interest on safe Treasuries.
What about the IMF articles mentioned that require a country to accept its own currency in exchange for Special Drawing Rights or the seller’s own currency? Does that mean that all signatories have abandoned their floating rate currency? Have they lost domestic policy space? Are they then open to speculative attacks, as if they were on a fixed exchange rate system?
First it is important to note that this is a self-imposed constraint. Governments have adopted a wide variety of these. The US government for example has a self-imposed debt limit. We just went through a huge debate about raising it. Clearly, markets did not force that on the US. Similarly, the IMF Articles of Agreement were adopted—not forced by any kind of market forces or logic.
And in practice, they have no material impact on domestic policy space. Let us say the Chinese decide to submit Dollars to the US to demand payment in RMB. Has the US pegged to RMB? No. It will provide RMB at the current exchange rate. Will this pose an affordability problem? No. Assume the US runs out of RMB. It then goes to foreign exchange markets and uses Dollars to buy RMB at the current exchange rate. Will it run out of Dollars? No. It creates as many Dollars as necessary to buy as many RMBs as it needs. It can meet all demands as they come due.
Now, the great fear is that this will cause the Dollar to depreciate (the RMB to appreciate). So here’s the fear of our deficit hysterians: China might submit $2 trillion in US currency (reserves and Treasuries), demanding RMB, causing the Dollar to collapse. Really? That is what China wants? What happens to Chinese sales to the US? What happens to the value of Dollar assets held by China? Do you really believe China would do this?
China wants to sell some of its output to the US; if the Dollar collapses, it says “bye bye” to sales. It already holds substantial Dollar reserves. If the Dollar collapses, it is stuck holding an asset that falls in value. Now, in truth, no central bank needs to worry about that. So what if it holds worthless assets. (Just ask the Fed—it bought up toxic waste assets that really have no value at all, in order to save the banksters on Wall Street. That is a topic for another day.) But the Chinese do seem to worry about that—indeed, that is why they keep telling the US to maintain the dollar’s value, or else! (Or else what? Well, nothing. It is a lot like holding a gun to your head and demanding ransom before you blow your brains out. Again, a topic for another time.) The point is that the hyperventilator’s scenario is just not plausible. Current external holders of the Dollar have no interest in seeing it collapse.
Further, so far as I can tell, the Articles are designed to allow countries facing their own payment problems to submit their foreign currency holdings to obtain SDRs (or to drain their own currency out of foreign exchange markets—to stabilize the value of their own currency). The purpose of the Articles is NOT to support speculative attacks—but to protect countries from speculative attacks. If China ever did attempt to crash the dollar in the manner imagined by some hysterians, I suspect the Articles would be set aside until the attack ended. In other words, the Articles were adopted to help stabilize international financial markets, not to enhance destabilizing forces.
If you think about the Bretton Woods standard, the Articles imposed discipline. The Dollar was pegged to gold, and all other nations pegged to the Dollar. The Articles forced each nation to carefully manage foreign currency reserves (meaning Dollars) to ensure they could convert on a fixed exchange rate to Dollars. If too much of a country’s domestic currency was held externally, a fear would grow that it could not maintain the peg to the Dollar; foreign holders could present the currency and demand Dollars. With the Dollar and most other important currencies floating, the Articles do not impose discipline on them. But foreign holders can use the Articles to stabilize their own currencies.
There was a question about Russia’s default that Scott Fullwiler answered (directing readers to Warren Mosler’s piece). But then the question was “why” did Russia choose to default. As best I can determine (and I am no expert although I happened to be in the room when Warren was on the phone during the crisis) it was a political decision. We cannot completely ignore politics. Yes, Congress could have decided not to raise the debt limit. We appeared to be quite close. There was no good economic reason to do it—but politics can lead to some crazy results.
We will deal later with the question asking why money MUST be an IOU.
Tuesday, August 16, 2011
If you liked Sheila Bair you would have loved Ed Gray and Tim Ryan – Part 3
By William K. Black
(Cross-posted with Benzinga.com)
This is the third part in a series discussing financial regulation. Sheila Bair, FDIC Chair, has justly reserved praise for her service. Her willingness to support meaningful regulation distressed the Obama administration (and would have enraged the Bush administration). Without in any way diminishing her accomplishments it is important to understand that regulation has become so pathetic that Bair's actions seem to be the zenith of regulatory vigor. We live in a time when even progressives have given up on regulation. Effective financial regulation is not only possible but essential if we are to avoid suffering recurrent, intensifying financial crises. We need to insist that regardless of the party in power the financial regulatory professionals are supported in accomplishing their prime mission – serving as the regulatory “cops on the beat.” Only regulatory cops on the beat can break the “Gresham's dynamic” that accounting control fraud causes that can produce fraud epidemics, hyper-inflate bubbles, and cause financial crises. This installment shows how vigorous and effective regulation can be.
(Cross-posted with Benzinga.com)
This is the third part in a series discussing financial regulation. Sheila Bair, FDIC Chair, has justly reserved praise for her service. Her willingness to support meaningful regulation distressed the Obama administration (and would have enraged the Bush administration). Without in any way diminishing her accomplishments it is important to understand that regulation has become so pathetic that Bair's actions seem to be the zenith of regulatory vigor. We live in a time when even progressives have given up on regulation. Effective financial regulation is not only possible but essential if we are to avoid suffering recurrent, intensifying financial crises. We need to insist that regardless of the party in power the financial regulatory professionals are supported in accomplishing their prime mission – serving as the regulatory “cops on the beat.” Only regulatory cops on the beat can break the “Gresham's dynamic” that accounting control fraud causes that can produce fraud epidemics, hyper-inflate bubbles, and cause financial crises. This installment shows how vigorous and effective regulation can be.
Tuesday, August 16, 2011
Monday, August 15, 2011
TODAY ON MODERN MONEY PRIMER
Wray explains the implications of exchange rate regimes for Modern Money Theory:
Floating vs fixed exchange rate regimes. The previous blogs were quite general and apply to all countries that use a domestic currency. It does not matter whether these currencies are pegged to a foreign currency or to a precious metal, or whether they are freely floating—the principles are the same. In this blog we will examine the implications of exchange regimes for our analysis.Read the full post at MMP#11: MODERN MONEY THEORY AND ALTERNATIVE EXCHANGE RATE REGIMES
Monday, August 15, 2011
MMP BLOG #11: MODERN MONEY THEORY AND ALTERNATIVE EXCHANGE RATE REGIMES
L. RANDALL WRAY
Floating vs fixed exchange rate regimes. The previous blogs were quite general and apply to all countries that use a domestic currency. It does not matter whether these currencies are pegged to a foreign currency or to a precious metal, or whether they are freely floating—the principles are the same. In this blog we will examine the implications of exchange regimes for our analysis.
Let us deal with the case of governments that do not promise to convert their currencies on demand into precious metals or anything else. When a $5 note is presented to the US Treasury, it can be used to pay taxes or it can be exchanged for five $1 notes (or for some combination of notes and coins to total $5)—but the US government will not convert it to anything else.
Further, the US government does not promise to maintain the exchange rate of US Dollars at any particular level. We can designate the US Dollar as an example of a sovereign currency that is nonconvertible, and we can say that the US operates with a floating exchange rate. Examples of such currencies include the US Dollar, the Australian Dollar, the Canadian Dollar, the UK Pound, the Japanese Yen, the Turkish Lira, the Mexican Peso, the Argentinean Peso, and so on.
In the following sections we will distinguish between these sovereign nonconvertible floating currencies and currencies that are convertible at fixed exchange rates.
The gold standard and fixed exchange rates. A century ago, many nations operated with a gold standard in which the country not only promised to redeem its currency for gold, but also promised to make this redemption at a fixed exchange rate.
An example of a fixed exchange rate is a promise to convert thirty-five US Dollars to one ounce of gold. For many years, this was indeed the official US exchange rate. Other nations also adopted fixed exchange rates, pegging the value of their currency either to gold or, after WWII, to the US Dollar.
For example, the official exchange rate for the UK Pound was $2.80 US. In other words, the government of the UK would provide $2.80 (US currency) for each UK Pound presented for conversion. With an international fixed exchange rate system, each currency will be fixed in value relative to all other currencies in the system.
Sunday, August 14, 2011
Anti "MMT Types" Memes Migrate to Stage II
One of the famous statements attributed to Mahatma Gandhi is that opposition to new, powerful ideas goes through three stages. First, they ignore you. Then they attack you. Then you win. Modern Monetary Theory (MMT) has reached the second stage. It has, on the same day, been attacked by Paul Krugman and John Carney (CNBC.com’s “senior editor”) in their unrelated columns.
The attacks are particularly interesting because they share two characteristics. They independently use the meme “MMT types” to disparage their opponents and they do not engage the accuracy of MMT theory. The CNBC commentator dismisses MMT because he fears that if members of Congress understood how monetary operations worked they would be tempted to support government programs. The CNBC commentator has an intense ideological opposition to government programs, so he opposes MMT. Note that he opposes MMT because it is substantively correct. That is the oddest objection to a theory that I have seen presented.
CNBC’s hostility to MMT was predictable and its commentator was playing by modern journalistic rules with no pretense to academic objectivity. Krugman’s disparaging dismissal of “MMT types” based on a straw man argument that he falsely ascribes to MMT is far more embarrassing because he is a globally prominent academic.
I am not an “MMT type.” MMT is a macroeconomic theory. I teach courses in microeconomics, law, regulation, finance, and criminology at the University of Missouri-Kansas City (and previously at the LBJ School of Public Affairs at the University of Texas at Austin). I’m still trying to get past the first stage (being ignored) with Krugman. He cited one of my columns favorably in his blog in which I recounted ECB President Trichet’s 2004 speech in Ireland urging new EU nations to use Ireland as their economic model. My work explains how accounting control frauds drive our recurrent, intensifying crises and what policies create the criminogenic environments that produce fraud epidemics and hyper-inflate financial bubbles. Criminological research findings would add considerable support and new insights to Krugman. Scores of economists now cite our work, but Krugman still shares the characteristic reluctance of economists to use the “f” word (fraud) to describe frauds.
Saturday, August 13, 2011
Interview with Randy Wray, Regarding the Next Crisis (Part 2)
(cross-posted with Mecpoc.org)
The following is Part Two of an interview with Randy Wray on the Global Crisis and the extent of the possibility of another crisis. It was conducted by students Inigo Garcia, Fahd Arnouk, and James Jasper, at Franklin College Switzerland for Mecpoc. (4 May 2011)
Mecpoc: In your writings, you argue that losing the monetary and fiscal independence that currency sovereignty gives would prevent a country from pursuing certain policies such as full employment. How big of a problem is the fact that the countries that are part of the Economic and Monetary Union in Europe are no longer sovereign? Is this really going to affect the future of the European Union? Is there a way out of it?
Randy Wray (RW): As early as 1996, I was writing on the EU, and stating that this is a system designed to fail. The system will fail. The fundamental problem is that the countries are not sovereign and that they have adopted foreign currencies. The ECB always has the ability to create euros, but it is prohibited from buying the government debt of each individual country, and so you couldn’t use the normal procedure used in any sovereign country where the central bank either directly buys sovereign debt or it has an arrangement, like we do in the United States, where the Treasury first sells the debt to a private bank and then the Fed buys it from a private bank. So it is just a little more round about, but it has exactly the same impact of creating dollar reserves as well as deposits in the Treasury’s account that it can use for fiscal policy.
The ECB was prohibited to this, so you always had a constraint on the individual countries that they can only get euros by borrowing or exporting, but you cannot all be exporters. So some countries will be the exporters and some are the importers, and in net, this does not create euros. You could borrow euros from another country—for example from the net exporting countries, so that relieves the constraint a bit by not being completely constrained to exports. But that just means that if you are a net importer, you are going to be increasing your debts, external debts, to other European countries and eventually you are going to have to adjust your trade, or you are going to get shut-off, downgraded. It couldn’t last.
Then, the crisis hits, and the ECB starts providing loans in euros and creates new ways to finance individual country’s foreign debt–trying to prevent default or even worse downgrades of the debt, which the market wouldn’t buy either.
Is there a way out? Sure. And it is not hard at all to come up with solutions that are economically viable. One would be that you just allow the ECB to provide funding for individual countries, and they could do it directly. The ECB can start buying government debt, or they can do it indirectly by proving loans of reserves to central banks or private banks so that they can buy the debt.
Another is that you do it through fiscal policy, and that would be to increase the size of the budget of the European Parliament. Right now they have a budget of less than 1 percent of GDP for Europe versus our Congress that has over 20 percent of U.S. GDP to play with. And in the US they redistribute it among the states, so we have fiscal transfers to the poor states. If the European Parliament had a budget of 15 percent of GDP it probably would be enough to solve all the financial problems in Europe. With 15 percent of GDP they can target Greece, Portugal, Ireland, and so on by providing fiscal transfers to them. That would solve the problem.
Either one of those. But politically I don’t think either of these is possible, that is the problem.
Saturday, August 13, 2011
L. Randall Wray interviewed by Ian Masters on KPFK FM-90.7 - Los Angeles
L. Randall Wray was interviewed by Ian Masters on KPFK FM-90.7 - Los Angeles. Click here to listen to the full interview. You can also listen to the full program.
Background Briefing with Ian Masters:
Background Briefing with Ian Masters:
Economist Randall Wray joins us for a macro-economic analysis of adverse economic trends at home and abroad amid dire predictions of a double-dip recession in the U.S. and defaults in Europe. We will try to connect the dots to see if we are indeed at a Smoot-Hawley moment where the Congress, instead of reversing economic decline, has accelerated it.
Saturday, August 13, 2011
William K. Black interviewed by Ian Masters on KPFK FM-90.7 - Los Angeles
William K. Black was interviewed by Ian Masters on KPFK FM-90.7 - Los Angeles. Click here to listen to the full interview. You can also listen to the full program.
We begin by discussing the continued uncertainty about financial stability in the Eurozone, and the European Central Bank’s ability to weather the accumulating debt burden of Greece, Ireland, Portugal, Spain and Italy. William K. Black, the former litigation director of the Federal Home Loan Bank Board, who investigated the Savings and Loan disaster of the 1980’s, joins us to assess the exposure of German banks and how much they are hiding bad loans.
Friday, August 12, 2011
Pavlina Tcherneva on KPFK FM-90.7 - Los Angeles
Pavlina Tcherneva was interviewed by Ian Masters on KPFK FM-90.7 - Los Angeles. To listen to the interview click here.
Background Briefing with Ian Masters:
"we look into the state of economic literacy in the United States following the debt-ceiling debacle and the S&P debt-rating agency’s repudiation of the deal that has set off financial tremors around the globe. Research scholar at the Levy Economics Institute, Pavlina Tcherneva joins us to see if any lessons were learned from a brazen act of stupidity that has the nation’s self-inflicted financial wound getting worse as those responsible blame everyone but themselves."
Wednesday, August 10, 2011
BLOG #10 RESPONSES: ACCOUNTING FOR MONEY FLOWS
L. RANDALL WRAY
Thanks for comments. I am cutting off the responses early, and will keep this short, because I am in Euroland and preparing to fly back.
Let me quickly respond to the six people who commented, and then provide a short answer to the homework question.
Had ‘Nuff: Money of account can be replaced by medium of exchange; domestic currency should include demand deposits; government IOUs are not debt; currency tax.
Answer: Think of it this way: Money of account is the measure (foot, yard, inch), medium of exchange is the thing being measured (shoe, arm, earlobe). Domestic currency is the government’s IOU; demand deposits are bank IOUs—so in my view we should not mix them. They are issued by quite different entities. An IOU is a debt, so government IOUs are debts. Not sure what point you are trying to make.
Thanks for comments. I am cutting off the responses early, and will keep this short, because I am in Euroland and preparing to fly back.
Let me quickly respond to the six people who commented, and then provide a short answer to the homework question.
Neil: One imposed constraint is that banks can refuse instructions to make transfers, including transfers ordered by government that has abandoned its fiat money.
Answer: OK for individuals the bank might refuse in two cases: apparent fraud or insufficient funds. We certainly applaud any bank that refuses to shift funds out of our account if it suspects fraud! We are not quite so happy when it refuses to clear a check in the case of an overdraft, because we get charged fees. But, OK, so far. In the case of government, I’m not quite so willing to go along with your suggestion, for two reasons. First, I do not really like the term fiat money and do not know what it is supposed to mean. I use the term sovereign currency. As I will discuss in coming weeks, there are different sovereign currency regimes—from fixed to floating rates. A sovereign’s currency is, on my definition, sovereign. There are constraints on sovereign spending, including those self imposed. It could instruct its bank (the central bank) NOT to make payments when its deposits are insufficient. It might even instruct the CB to impose fees for insufficient funds! Beyond that I am not quite sure what point you are making. Even if the sovereign government did not have a “fiat currency” (whatever that means) it could decapitate any central bankers that bounced checks. This might become more clear soon.Had ‘Nuff: Money of account can be replaced by medium of exchange; domestic currency should include demand deposits; government IOUs are not debt; currency tax.
Answer: Think of it this way: Money of account is the measure (foot, yard, inch), medium of exchange is the thing being measured (shoe, arm, earlobe). Domestic currency is the government’s IOU; demand deposits are bank IOUs—so in my view we should not mix them. They are issued by quite different entities. An IOU is a debt, so government IOUs are debts. Not sure what point you are trying to make.
Tuesday, August 09, 2011
Poverty, Joblessness, and the Job Guarantee
By Pavlina R. Tcherneva
A recent report on the State of America’s Children revealed distressing statistics. More than 1 in 5 children live in poverty in the U.S., by far the most impoverished age group in the nation. Between 2008 and 2009 child poverty jumped 10%, the single largest annual jump in the data’s history. While the U.S. is the wealthiest nation in the world in terms of GDP (and # of billionaires), it ranks last in relative child poverty among all industrialized nations.
A recent report on the State of America’s Children revealed distressing statistics. More than 1 in 5 children live in poverty in the U.S., by far the most impoverished age group in the nation. Between 2008 and 2009 child poverty jumped 10%, the single largest annual jump in the data’s history. While the U.S. is the wealthiest nation in the world in terms of GDP (and # of billionaires), it ranks last in relative child poverty among all industrialized nations.
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| source: http://yglesias.thinkprogress.org/ |
Overall we have 46.3 million people in poverty in the U.S. (the largest number in the postwar era), which is 14.3% of the total population—a percentage that has been trending up since 2000.
Two of the primary causes of poverty are the skewed income distribution in the U.S. and the high levels of unemployment.
While the income of the top 0.01% of households rose by 68% during 2002-2008, the incomes of the bottom 90% fell by 4% (note that the richest 10% of households in the U.S. take nearly 50% of the entire income in the economy). Indeed over the last few years we have witnessed one of the largest redistributions of income and wealth to the top in history.
Tuesday, August 09, 2011
The European Central Bank Rises above the Law and its Principles
By William K. Black
The European Central Bank (ECB), at the insistence of Germany’s government, was created with a single mission – price stability. Its mono-mission represented an explicit rejection of the U.S. Federal Reserve’s dual mission of price stability and full employment. The usual explanation for this choice is German’s phobia about inflation arising from the searing experience of hyper-inflation during the Weimar Republic. The hyper-inflation discredited the Republic and is often blamed for Hitler’s electoral successes. One must be cautious about this explanation, however, for the demands of the German public did not drive the creation of the ECB. The creation of the euro required the creation of the ECB. Polls showed that had the German public’s policy views prevailed, Germany would have rejected adoption of the euro by a wide margin. German businesses, particularly its banks, pushed Germany to adopt the euro and they made sure that the German public was not permitted to vote on the creation of the euro and Germany’s adoption of the euro.
German banks did not trust Italy and demanded that the EC’s sole mission be preventing inflation (more precisely, any inflation above roughly 0.5 percent annually.) The ECB was to be run strictly along the lines of German Central Bank’s holy war against inflation. Implementing the ECB’s exclusive focus on stopping inflation created a political tension with France, Germany’s partner in running the EU. France successfully demanded that the first head of the ECB serve only half his term and be succeeded by a French official. Germany’s obsession with avoiding even modest inflation, however, was shared by many senior EU central bankers so regardless of nationality, ECB senior bankers have acted as if they were conservative German central bankers.
The ECB praised its mono-mission and asserted its superiority over the U.S. model. The mono-mission was the perfect accompaniment for the rising cult of theoclassical economics. The active use of fiscal policy to counter recessions was anathema, a tool of the Keynesian devil. The ECB’s theoclassical dogma was clear and proud: (1) democratic governments have perverse incentives to seek to lower unemployment, (2) which create an inflationary policy bias, which (3) can only be countered by a rigorously independent central bank, with (4) a mono-mission set by statute which rested exclusively on preventing inflation regardless of its short-term effect on unemployment, and (5) a belief that ending inflation would automatically minimize long-term unemployment.
The European Central Bank (ECB), at the insistence of Germany’s government, was created with a single mission – price stability. Its mono-mission represented an explicit rejection of the U.S. Federal Reserve’s dual mission of price stability and full employment. The usual explanation for this choice is German’s phobia about inflation arising from the searing experience of hyper-inflation during the Weimar Republic. The hyper-inflation discredited the Republic and is often blamed for Hitler’s electoral successes. One must be cautious about this explanation, however, for the demands of the German public did not drive the creation of the ECB. The creation of the euro required the creation of the ECB. Polls showed that had the German public’s policy views prevailed, Germany would have rejected adoption of the euro by a wide margin. German businesses, particularly its banks, pushed Germany to adopt the euro and they made sure that the German public was not permitted to vote on the creation of the euro and Germany’s adoption of the euro.
German banks did not trust Italy and demanded that the EC’s sole mission be preventing inflation (more precisely, any inflation above roughly 0.5 percent annually.) The ECB was to be run strictly along the lines of German Central Bank’s holy war against inflation. Implementing the ECB’s exclusive focus on stopping inflation created a political tension with France, Germany’s partner in running the EU. France successfully demanded that the first head of the ECB serve only half his term and be succeeded by a French official. Germany’s obsession with avoiding even modest inflation, however, was shared by many senior EU central bankers so regardless of nationality, ECB senior bankers have acted as if they were conservative German central bankers.
The ECB praised its mono-mission and asserted its superiority over the U.S. model. The mono-mission was the perfect accompaniment for the rising cult of theoclassical economics. The active use of fiscal policy to counter recessions was anathema, a tool of the Keynesian devil. The ECB’s theoclassical dogma was clear and proud: (1) democratic governments have perverse incentives to seek to lower unemployment, (2) which create an inflationary policy bias, which (3) can only be countered by a rigorously independent central bank, with (4) a mono-mission set by statute which rested exclusively on preventing inflation regardless of its short-term effect on unemployment, and (5) a belief that ending inflation would automatically minimize long-term unemployment.
Monday, August 08, 2011
MMP Post #10 -- Keeping Track of Stocks and Flows: The Money of Account
Stocks and flows are denominated in the national money of account. In previous weeks we examined the definitions of stocks and flows, as well as the relations between the two. (It might be helpful if you quickly review the previous discussion on stocks and flows, and the relation between the two: flows accumulate to stocks.) Financial stocks and financial flows are denominated in the national money of account. In this blog we will go through the details of keeping track of stocks and flows in the money of account. That will also lead us into a discussion of the relation between “money” and “spending”—how do we “pay for” things?
As discussed in the past two weeks, the money of account is almost always the domestic currency—the money of account chosen by the government. In some cases, however, the accounts can be kept in a foreign currency. For the purposes of this blog we will ignore that complication—all the record keeping discussed here will be presumed to take place in a single national unit of account. Let us begin with the case of an employee earning wages.
While working, the employee earns a flow of wages denominated in a money of account accumulating a monetary claim on the employer. On payday, the employer eliminates the obligation by providing a paycheck that is a liability of the employer’s bank. Again, that is denominated in the national money of account.
If desired, the worker can cash the check at her bank, receiving the government’s currency—again an IOU, but this time a debt of the government. Alternatively, the check can be deposited in the worker’s bank, leaving the worker with an IOU of her bank, denominated in the money of account.
Wage income that is not used for consumption purchases represents a flow of saving, accumulated as a stock of wealth. The saving can be held as a bank deposit, that is, as financial wealth (the bank’s liability).
When it comes time to pay taxes, the worker writes a check to the treasury, which then debits the reserves of the worker’s bank. Reserves are just a special form of government currency used by banks to make payments to one another and to the government. Like all currency, reserves are the government’s IOU.
So, when taxes are paid, the taxpayer’s tax liability to the government is eliminated. At the same time, the government’s IOU that takes the form of bank reserves is also eliminated. The tax payment reduces the worker’s financial wealth because her bank deposit is debited by the amount of the tax payment.
We can conceive of a flow of taxes imposed on workers, for example, as an obligation to pay ten percent of hourly wages to government. A liability to government accumulates over the weeks as wages are earned, which is a claim on the worker’s wealth. The tax liability, measured in the money of account, is eliminated when taxes are paid by reducing the worker’s financial wealth (debiting deposits also measured in the money of account) and the bank’s reserves are simultaneously debited by government.
At the same time, the government’s asset (the tax liability owed by the worker) is eliminated when taxes are paid, and the government’s liability (the reserves held by private banks) is also eliminated.
Sometimes it is useful to compare these flows to water flowing in a river, that gets accumulated as a stock behind a dam. However, it is important to understand that these monetary stocks and flows are conceptually nothing more than accounting entries, measured in the money of account. Unlike water flowing in a stream, or held in a reservoir behind a dam, the money that is flowing or accumulating does not need to have any physical presence beyond ink on paper or electrical charges on a computer hard-drive.
Indeed, in the modern economy, wages can be directly credited to a bank account, and taxes can be paid without use of checks by debiting accounts directly. We can easily imagine doing away with coins and paper notes as well as check books, with all payments made through electronic entries on computer hard-drives.
All financial wealth could similarly be accounted for without use of paper. Indeed, most payments and most financial wealth are already nothing more than electronic entries, always denominated in a national money of account. A payment leads to an electronic debit of the account of the payer, and a credit to the account of the payee—all recorded using electrical charges.
The financial system as electronic scoreboard. The modern financial system is nothing but an elaborate system of record-keeping, a sort of financial scoring of the game of life in a capitalist economy.
For those who are familiar with the sport of American football, financial scoring can be compared with the sport’s scoreboard. When a team scores a touchdown, the official scorer awards points, and electronic pulses are sent to the appropriate combination of LEDs so that the scoreboard will show the number six. As the game progresses, point totals are adjusted for each team.
The points have no real physical presence, they simply reflect a record of the performance of each team according to the rules of the game. They are not “backed” by anything, although they are valuable because the team that accumulates the most points is deemed the “winner”—perhaps rewarded with fame and fortune.
Further, sometimes points are taken away after review by officials determines that rules were broken and that penalties should be assessed. The points that are taken away don’t really go anywhere—they simply disappear as the scorekeeper deducts them from the score.
Similarly, in the game of life, earned income leads to “points” credited to the “score” that is kept by financial institutions. Unlike the game of football, in the game of life, every “point” that is awarded to one player is deducted from the “score” of another—either reducing the payer’s assets or increasing her liabilities.
Accountants in the game of life are very careful to ensure that financial accounts always balance. The payment of wages leads to a debit of the employer’s “score” at the bank, and a credit to the employee’s “score”, but at the same time, the wage payment eliminates the employer’s implicit obligation to pay accrued wages as well as the employee’s legal claim to wages.
So, while the game of life is a bit more complicated than the football game, the idea that record keeping in terms of money is a lot like record keeping in terms of points can help us to remember that money is not a “thing” but rather is a unit of account in which we keep track of all the debits and credits—or, “points”.
Your homework assignment (should you choose to accept it): Think about government spending and taxing in terms of those scoreboard electronic entries. When government “spends money”, where does it come from? When we pay taxes, where does the “money” go? In what sense does the government “spend the money it receives in tax payments?”
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