beowulf asked me to post this response to David Weigel of Slate Magazine.
Here is David Weigels half-assed, zero research, and zero curiosity post that doesn’t even bother to question why the greatest country is human history is forced to resort to extraordinary measures.
Here is beowulfs response:
There’s nothing fanciful about it. The strange thing is that the USG is constrained by debt ceiling but a part of the USG (The Fed describes itself as “an independent government agency”) is unconstrained by a debt ceiling. Even more anomalously, Fed-held Treasuries are counted against the USG debt ceiling.
This isn’t about selling drilling rights on the moon but a practice almost as old as the Republic. The US Mint has used coin seigniorage continuously since the Coinage Act of 1792 (in a legal sense, a single $1 trillion platinum coin is the same as trillion $1 coins but with far less expense and effort). It violates no laws nor federal regulations nor prior obligations for the USG to transfer debts from the constrained whole to an unconstrained part (that is violates all logic is the fault of Congress).
The idea actually originated in a note I sent the Department of the Treasury on a collateral issue (as it happened, I had “buried the lede”). I posted about this on Firedoglake (and Correntewire) only after discussing the issue at Warren Mosler’s blog (Incidentally, I’m hardly a lefty. I voted for Romney in the 2008 GOP primaries, will probably do so again next year).
Writer Joe Firestone suggested to me that the platinum coin seigniorage issue was something worth posting a blog about and bugged me until I did (after which, Joe took the leading oar on developing the idea). I’d point out that Warren Mosler also picked up on the economic ramifications very early. But I trust that every reader here with an interest in economics has already read his book The Seven Deadly Innocent Frauds (you can download for free from his site if you haven’t), so that should come as no surprise.
http://moslereconomics.com/2011/01/20/joe-firestone-post-on-sidestepping-the-debt-ceiling-issue-with-coin-seigniorage/Of course, there is historical precedence for using coinage to pay the national debt, the Legal Tender Act of 1862 authorized the issuance of fiat currency, US Notes or “Greenbacks” (the predecessor of today’s Federal Reserve Notes) required that Tsy pay debt service only with US Mint-issued coins. Of course Nixon freeing us from the gold standard changed everything, but if our politicians understood that, we wouldn’t have a debt ceiling now would we?
Back in December of 2008 – during the worst moments of our economic crisis – I pounded the table on the size of the stimulus. I said it needed to be at least $1.0T, and that it should be larger.
Turns out, this was correct.
The BEA recently revised the size of the great recession upwards.
Not only that, it means we should be doing more today, right now, to get the economy on track. We still need more demand to make companies hire. We still need a larger payroll tax cut.
In related news Tyler Cowen debates Zero Marginal Product workers, and misunderstands Minsky at the same time. But he’s really smart, right? [Update: Stephan points out in the comments Tyler Cowen is an important part of the Koch funded Mercatus center.]
Today is honorary “Trillion Dollar Coin” day here at the Traders Crucible. I’ve changed the name of the blog for a limited time! Woot!
Inquiring minds want to know. Commenter Kris Smith provides the obvious-after-its-said answer:
[Update: Tom Hickey points out that Grover Norquist (in the comments and over at Marginal Revolution) has a strong claim to this honor.]
Here is a full list of why monetary policy sucks:
- promotes debt slavery
- works very slowly
- ignores the lowest 30% of earners
- anti-democratic. [Update: "why TC - thats crazy talk!" and I reply " You dare doubt me? look here. "Money Quote: "But the central bank can only achieve that control if it is willing to commit to letting the fiscal authority default."]
- difficult to manage
- It must – must – end in a massive real estate bust – which destroys the primary store of value for the lower 80% of the population.
- Difficult to observe effectiveness
- Uses real estate lending as a transmission mechanism
- Indirect instead of direct action
- Promotes a rentier class (thanks Neil!)
- Promotes a massive banking system
- Zero lower bound
- Can’t be very effective in a real estate crash.
- Promotes the military industrial complex to the exclusion of social welfare
There’s probably more. We’ve been blinded by economists talking about monetary policy as some abstract concept that magically makes the economy grow or contract a bit more. Monetary policy works because it transmits through lending, primarily through real estate lending.
There are gigantic problems even when the real estate channel is working. When the real estate channel is broken – like it is today – the problems result in Japan.
[Update: A shout out to Clonal Antibody. We had a discussion a while back that has been sitting in my mind ever since we had it, and this is part of what I've been thinking about...]
I was thinking a ton about debt slavery during the day, and then my ol’ man beowulf chimed in:
“Michael Hudson’s made the point that banks want property taxes as low as possible so they can expand the share of income they can take in mortgage payments (and other monthly credit streams).”
Yep! What another bad reason to use monetary policy.
I ended up with a whole list of reasons why monetary policy sucks, and Neil Wilson added another. There will be another post with that full list.
But this post is about how monetary policy promotes debt slavery.
Monetary policy can only work by giving a middle man – banks and lenders – claims on our future income. This is the expressed goal of monetary policy – increase or decrease the amount of credit in the economy, and therefore stimulate economic activity.
The primary way the economy expands is by people taking on more debt.
Now, I am not an enemy of debt, but I want to be clear.
The way monetary policy works is through increasing debt in the system. Monetary policy only works by taking a portion of future income and giving it to banks.
Of course this is great for the rentier class, but for the economy, not so much. We’re basically taking an ever larger chunk of our earnings and giving it to lenders.
- So why do we have a real estate tax exemption? Higher housing prices for banks to lend against.
- Why do we have banks pushing for low land taxes? Higher housing prices for banks to lend against.
Higher prices for real estate means more money for banks and less money for people. And it isn’t just a one off payment – its a stream of payments over years and years!
This is another big reason why monetary policy is a horrible choice to control our economy.
Oddly, this was inspired by vimothy….
“Isn’t the problem with the idea that doubling the base would automatically double the price level what Nick Rowe calls the short-side rule? If reserves are scarce, then bank lending or the supply of broad money (or whatever) is limited by reserves. If reserves are not scarce, then bank lending is limited by something else, like finding credit worthy-borrowers.
I do not see why the number of credit worthy borrowers demanding credit would automatically double, simply because the Fed doubled the base. It strikes me that the two things should be mostly independent.”
That’s one of the major MMT points. The constraint is nearly always “creditworthy borrowers at this interest rate”, not lending capability. This is one of the operational constraints MMTers talk about all the time.
What matters is finding someone both willing and able to borrow enough money to get the economy moving or slowing.
When banks need more reserves, they go to the federal reserve and borrow them. The aren’t reserve constrained.
During most times, the willing criteria isn’t a problem, it’s the able criteria. So lowering rates makes investments more attractive even to bankers, because the ability to pay gets higher as the interest rate gets lower. Therefore, lowering interest rates makes bankers lower their standards for “able to borrow”.
But overall, this monetary mechanism is really indirect. It is rube goldberg method of economic stimulus.
Why does monetary policy work in the real world? Because it makes people buy more or less real estate. That’s what it does. The interest rate markets serve one master – real estate.
Real estate is the 800 pound gorilla of interest rates markets. Corporate lending is 1/2 of the size of the mortgage markets in a typical year.
That’s the problem with monetary policy. And that’s what I don’t see Scott Sumner address even for a second in all his talking about the power of monetary policy. Monetary policy depends on transmitting demand to the broader economy through stimulating or contracting real estate markets.
And real estate markets might be uniquely bad place in our economy, because of the reasons I lay out below.
Everything else is secondary when considering monetary policy.
And this is the problem with monetary policy. What monetary policy does is set the only place we can push on the economy to “residential real estate and some business borrowing”. That’s it.
The theoretical models about interest rate determination matter because the real estate markets are so large relative to the economy. That’s how the theoretical monetary models work – how the must work – in the real world.
Of course, real estate markets can easily be fuddled and may depend upon many factors other than the amount of base money, or the interest rates.
It’s a huge problem. Even when the real estate markets are functioning properly, there are vast, gigantic, huge problems with the stimulus transmission mechanism:
- real estate transactions are costly -
- real estate transacations are bulky – they are huge relative to incomes
- real estate transactions take lots of time
- real estate transactions are extremely geographically dependent
- real estate transactions aren’t easily reversible
Monetary policy forces us to push on what is the slowest moving, bulkiest, costly, and yet geographically limited area of the economy as our stimulus policy tool!
Ok some snark: I wonder why monetary policy takes 12-18 months to see impact? Why in the world would this be the case? I can’t figure it out – must be magic or incomplete markets or a breakdown of the EMH.
Then, corporate borrowing isn’t enough on its own, but it can be hugely subtractive or additive to the amount of simulus.
Corporate borrowing isnt’ enough on its own to be able to do much on its own, but its a bitch when it fights against the real estate cycle. It’s probably worse when it’s in sync with the real estate cycle, because all of a sudden, changes in monetary policy have unexpected results.
You can see the trap for monetary policy – the transmission process takes a year, then you keep pushing on it, then corporate lending kicks in, and exacerbates the entire process.
So we have a stimulus transmission mechanism thats:
- Very slow
- very uncertain
- Very stupid
Why in the hell are we using this? We’re trying to fly a jet plane with the broken controls of a cruise ship with monetary policy.
What MMT does is set the push place of stimulus policy to “anything/anywhere we want”. Mostly this would be to “domestic spending through more money directly to people.”
It isnt’ that MMTers dont’ think monetary policy doesn’t work, but rather that the transmission mechanisms for monetary policy to the real world economy is convoluted and sucks, and we can’t tell what the real world impact might be.
And that transmission mechanism sucks because we cannot observe so many things about it, its becomes a guessing game. Lowering rates or adding base money might increase the price level, or it might not – we need to wait months for people to decide to buy a house or something.
The price level determination is much more direct from the fiscal side. Once you establish base demand for the medium of exchange through taxation, the government can set price levels for anything it wants by paying a higher or lower price for something.
It sets base demand for the medium of exchange by taxation. It sets the store of value level through what it pays to the private market.
This is the core MMT insight – if you want to control the price level, it’s much easier to do it directly through financial purchases rather than through monetary easing.
Kocherlakota went through the fiscal theory of the price level and said “It’s a religious argument”. But it isn’t, because taxes drive a base level of demand for the medium of exchange. Once people demand to use this medium of exchange, it’s not religious at all.
Because we control the base demand for the currency through taxation, we can then choose to inflate any segment of the economy we choose with some decent amount of discretion by just buying more stuff in that segment.
Of course, this is terrifying responsibility. It’s absolute madness to assume that the spending would always be wise. It’s absolute madness to assume there won’t be misspent funds. It’s absolute madness to assume there will not be inflation.
But the alternative is “so many men no one needs”, sitting on their ass, while roads go un-repaired, and kids go hungry. We need to grow up and take responsibility for our actions.
jeeze. it’ ain’t that hard. This is gets to one of the problems with economics – it does not rely enough on the real world. Talking about things need to refer back to something real, concrete, and that acutally happens – otherwise it’s worse than useless.
Let’s face it. The “Trillion Dollar Coin” is the most certain option we have now to avoid a default on our debt. Lot’s of people have talked about it already – some of the readers of this blog are the originators of the idea.
Joe Firestone and beowulf began talking about a huge coin months and months ago. I have little or nothing to add to the discussion over legality and implementation.
This gigantic coin seems crazy to people. You can see how people react to it over at CNN. It’s a partizan divide.
The coin is made necessary because one political party wants to risk destroying our economy. They would rather push our economy into chaos rather than compromise. They value balanced budgets more than men and women having jobs. They would rather see less government spending than a kid able to eat breakfast.
The richest country in human history is being forced to issue a massively valued coin because extremists will not compromise.
The Wall Street Journal notices the reason why there is no hiring - there is no demand for more product.
“The main reason U.S. companies are reluctant to step up hiring is scant demand, rather than uncertainty over government policies, according to a majority of economists in a new Wall Street Journal survey.
“There is no demand,” said Paul Ashworth of Capital Economics. “Businesses aren’t confident enough, and the longer this goes on the harder it is to convince them that they should be.”
Holy smokes! We need more demand. There has actually been a slew of articles about this exact thing. I guess the meme is catching on:
Businesses hire when they are swamped with demand, not when they have high profits.
All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.
We’ve had so many people start to engage with MMT over the last few weeks. But this blog post in the FT takes the cake:
“The point here is that based on the tax and spend model, paying a tax of $1 is the equivalent of seeing $1′s worth of tax canceled by the Fed as agent for the Treasury. The national debt goes down by $1.
Or as Cook puts it:
It’s exactly as though an obsolete $1 note is torn up or burnt. Or another way of looking at it is that it is what happens when a Frequent Flyer Mile is redeemed against a flight.
Because the money everyone is paid is nothing more than a tax credit, there’s only one problem. It comes about when the number of tax credits issued outnumbers the total redeemable wealth of the nation (i.e. the tangible common equity of the nation is fully eroded). That’s clearly not the case in the United States.”
This is very close to MMT, in the financial times, being openly discussed. It’s also known as the fiscal theory of the price level for some people, but MMT is more elegant. It talks about the tax credits directly.
I pointed out a few months ago that MMT was moving to violently opposed. Yves said that MMT might be moving past the first of Ghandi’s three stages.
I think we’re moving past those stages pretty quickly. This strange little article in the FT – posted by one of their brightest stars – is a sign that we’re moving beyond that, to the self-evident stage.