Friday, May 30, 2014

Money Money Money: Concluded

Part III

Over the years I've said I'm fascinated by something called MMT (Modern Monetary Theory). I don't want to give the impression that I buy it all lock, stock and barrel. While I have no more than a rudimentary understanding of economics in general I became much more interested after the housing bubble burst and the subsequent economic collapse and malaise that followed. This week we learned that the U.S. economy contracted in the first quarter of 2014. No matter what excuse the current regime wants to cite (like bad weather) it's clearly bad news. The malaise continues.

MMT seems to me to be a version of classic Keynesian economic philosophy that factors into the equation the reality of fiat currency. They seem to want to follow the Keynesian prescriptions for government reaction to economic downturns, namely having the central government pump money into the economy to stimulate and reinvigorate demand. That is to say growing aggregate demand is the key to economic turnarounds. However, the part that fascinates me the most is their take on debt and deficits. To be clear MMT is talking about central government debt, not personal debt or local government debt. This is crucial because neither the public nor the local government can create money out of thin air, but the issuer of the currency can.

It is of course absolutely true that the U.S. Federal government can just create money by either printing it outright or selling bonds. They also regulate the banks that can create money out thin air by writing loans. The question is then: what is the "real" effect of this activity and at what level?

This is where reality separates from theory. I don't know enough to even venture a semi-intelligent answer. There are some things that seem pretty clear or fall under the rubric of common sense. To hear the Republicans/right-wingers carry on about debt and deficits you wonder how we've gotten this far without complete economic collapse and another Great Depression. Even I, and center-right guy, think a Federal balanced budget is a fool's game. Clearly sky high Federal debt is not the death knell of the economy. But then neither is it the savior. Since Obama has been president the yearly deficits are the highest in history and the aggregate national debt has grown exponentially to levels never seen before, yet this economy totally sucks. Clearly just pouring in gobs of Federal cash doesn't bring about economic heydays.

In a dynamic society and equally dynamic economy there are so many factors that make up the trajectory of economic trends it's impossible to put your finger on any one thing. Things like war, taxes, regulation, trade and immigration are all factors that are within the Administration's wheelhouse and can have profound impact on the economy if for no other reason than the potential for breeding of uncertainty. This has been a constant complaint about this regime since 2009. Things like automation, M and A, outsourcing/off shoring, natural disasters and bad weather can wreak havoc on the economy and those things can't be directly laid at the feet of a president. We've seen these things too.

So, what to do? Do they do something constructive? Or play the blame game?

The Administration and their sycophants (particularly the national media) have let loose a strategy with a goal of pinning this horrible economic malaise on income inequality. Scripted and in lockstep the plan was set into motion to coincide with the start of the 2014 mid term election campaign. For the faithful it's like selling ice cubes in the desert - who the hell likes rich people. What are the Republicans to do? Defend ultra-billionaires?

So along comes Thomas Piketty a French economist with his new book, a book I've not read, called Capital in the Twenty-First Century that has the nerdy economic world all atwitter. The MMT guys love this book. Since I haven't read it I can't say two hoots about it, but there are finally some counterpoints being printed that take the superstar Mr. Piketty to task.

The premise that I can gather is that Piketty plays right into the hands of the income inequality squawkers, the 1% vs the 99%. Again I'm not smart enough to know the real effect this so-called inequality has on normal people like me and my peers, though I'm sure it has some, both positive and negative. I am smart enough to know that ideology has everything to do with the numbers game guys like Piketty play. Essentially you can make the numbers say what ever you want. It seems that's exactly what Piketty does in this book.

For progressives and their Marxist brethren it's all about stealing the wealth of the rich and the mechanism to do that is government. The way to do it is scapegoating the wealthy and the best way to to breed this hatred and envy is to cook the numbers. Recently the Financial Times published a challenge to Piketty's numbers that compelled him to respond in a letter to Bloomberg News. Does anyone lash out when criticized if they are secure in the facts they put out? Again, I'll back down here because I don't have the facts myself.

In general the progressives treat economics as a knowable and demonstrable science, that if you just create the right formula (one that doesn't presumably have income inequality) you will get the perfect economic outcome. Sounds like communism to me actually. While the the Austrian School of economics likens economics to climate science - unpredictable and chaotic, a product of billions of individual transactions/interactions whose outcome can't be planned only ridden like surfer rides a wave.

I have gotten to the point of disbelieving everything the progressives say primarily because their track record is so poor. On the other hand the conservatives and market capitalists betray their own belief systems at every turn, as if they don't believe in them anymore than their sworn enemies.

The key it seems to me is the fact of income inequality. One: it is a fact. Two: it will always be. Therefore; Three: learn to live with it. The effort it takes to destroy it destroys everything.


Wednesday, May 21, 2014

Money Money Money: Part II

I rarely do this but I want to repost an article found online that really clarifies the point I was so clumsily trying to make in my recent post called Money Money Money.

Original article click here:

Federal budget process: What did Leon Panetta mean?
May 19, 2014 6:00 am  •  By Duane Catlett and Dan Metzger

Leon Panetta was recently the guest lecturer at the University of Montana’s annual Jones-Tamm Judicial Lecture. Mr. Panetta is a true patriot, having served with distinction for more than 20 years under two presidents. Under President Clinton he directed the Office of Management and Budget and later served as Clinton’s chief of staff. Under President Obama he served as secretary of defense and later as director of the CIA.

Mr. Panetta stated in his lecture that “the nation’s biggest security issue was its inability to deal with the budget.” Although many will interpret his statement as a call to cut the deficit, what he was really criticizing was the Congress’ inability to produce and pass a spending budget that would put some certainty into the ability of the nation to do strategic long term planning.

Like most Washington public servants, Mr. Panetta holds the old-fashioned view that federal budgets should be balanced and the magnitude of deficits is an important metric for the economy. This view is appropriate for households and businesses that have limited financial resources. However, the federal government issues the nation’s currency and is not constrained by financial resources. It has all the financial resources it needs and is constrained only by the nation’s productive resources.

Both political parties are dominated by the false view that the federal budget must be balanced. The only difference is that conservatives think the government has a spending problem and liberals think it is a revenue problem. Both are wrong and it is hurting America’s competitive global advantages.

In the modern world of fiat currency the federal government must focus on real resources (available materials, factories, infrastructure, labor, knowledge) instead of financial resources (money and bonds) in managing the economy. Money is the vehicle that allows the smooth movement of goods and services from sellers to buyers in the economy. The federal government as the sole issuer of the U.S. dollar can issue all the money it needs to move any resources of the nation.

The U.S. and most other nations of the world have used a fiat monetary system since President Nixon defaulted on the gold standard in 1971. Under a gold standard the quantity of money available to the nation is determined by its store of gold, which limits economic growth. Under a fiat system the available money varies with the growth of the economy, and depends on bank loans and federal spending. In the absence of adequate bank loans to make investments in our main-street economy, Congressional budget decisions are responsible for reviving a depressed economy.

The Congressional budget exercise should not be about achieving a balanced federal budget. The budget should be developed to assure that all available resources of the nation are put to good use. There is plenty of work to be done, and we can avoid high unemployment. The federal government can employ all the resources not employed by private industry. If unemployment is high, as it is now, federal deficits are too small.

Many will denounce deficits as causing inflation or adding to a gigantic national debt. They forget to mention that inflation is the result of demand greater than our productive capacity. But, government purchases of either goods or services from labor, which are readily available because of high unemployment, increase total production along with demand, and that benefits businesses. Such purchases are not inflationary.

They also fail to mention that the huge national debt is in reality a huge private asset. The national debt is nothing more than government bonds that individuals, banks, and pension funds hold in their accounts as secure savings instruments.

Mr. Panetta is correct that the nation is weakened when it fails to deal with the budget. But, forcing the federal budget to be balanced either by reducing spending or increasing taxes only hurts our main-street economy by preventing it from growing. Such austerity measures are appropriate only on the rare occasion when the economy is overheated and threatening inflation. A depressed economy, which is what we have today, requires higher spending and lower taxes.

The threat to our future generations is not from a gigantic national debt, which is in reality a gigantic collection of safe and secure savings instruments that will be held by our future generations. The real threat results from the U.S. Congress’ failure to responsibly spend money into circulation to fix our failing bridges, highways, waterways, sanitation systems, public schools, state universities and other public services that we citizens rely on in our daily lives.

Duane Catlett lives in Clancy. He is a retired career Ph.D chemist and materials technology manager. He is a student of Modern Money Theory and the role of government in our economy.

Dan Metzger  lives in Santa Fe, N.M. He is a retired Ph.D physicist and engineering manager. He is a serious student of Modern Money Theory.


Monday, May 12, 2014

The state of the economy: street level

Eight years ago my wife and I were doing a little paper route. It was for one of those local community weekly's. We did it for some exercise, certainly not for the money. We were fortunate enough to have the route in our own neighborhood. To set the stage this is a very very middle class neighborhood in the outskirts of a central city in a large metropolitan area. The average home was (at the time) probably worth about $160,000 and I'm guessing the average household income of $50,000.

This was a walking route with door to door delivery so we got up close to each house as we moved along. I remember remarking to my wife how nice almost all of the houses were, well kept up, fresh paint and little to no junk laying around. As we walked along we'd get ideas for landscaping and home improvements. There was nothing extravagant, it is lower end housing stock compared to the glittering suburbs just a few miles away, but it was nice.

Fast forward eight years. We now take our walks or ride our bikes through the same neighborhood for our exercise and fresh air. My how things have changed - and not for the better. Before when there was maybe one house per block that looked a little run down - or empty - now there are three or four at least. It's as if all home improvements/upkeep just stopped eight years ago. This spring there was a garage that literally collapsed under the weight of snow. It was probably a 50 year old garage, no different than mine in age, but mine is not anywhere near collapse. In addition to peeling paint and collapsing fences there are numerous piles of junk in some of  the yards.

There are numerous houses that sit empty, apparently abandoned. No doubt victims of foreclosure and job loss. Obviously these lawns are not mowed, snow never shoveled and sit in a general unkempt state. There are also many more immigrant families in the neighborhood and due to cultural differences or poverty these houses are often strewn with junk and abused. Where there has always been a problem with junk houses that mess was always inside the walls, these eyesores are outside for all to see.

Even worse is the city has stopped bothering to maintain the streets. In our neighborhood alone there were four water main breaks this past winter. Most of them are still pits in the ground, barely patched enough to prevent major frontend damage if your car should fall into one. Approaching mid-may now and we still have not had any potholes repaired.

As a measure of how the economy is doing it's like night a day. This is the kind of neighborhood that could permanently turn over and never come back to the state it was in eight years ago. This is how whole cities are lost - Detroit, Gary Indiana, East St Louis for example. There are already several neighborhoods in this 160 year old city that are beyond hope of ever returning to the condition my previously nice neighborhood was in less than a decade ago. If too many - pardon the expression - lowlifes invade or immigrants without American cultural sensitivity take over this neighborhood is toast. Young intact families will not move into the neighborhood to revitalize it. I for one will not be happy if that happens. The whole city will suffer.

The bottom line is if this moribund economy continues for even a few more years this is a scenario that will repeat in other currently vital big cities too. This particular city has escaped much of the urban decay that has ravaged the east and south over that last 40 years, but that's likely to end.


Thursday, May 01, 2014

Money Money Money

It seems the very last thing you want to hear about the economy is steady as she goes, that the economy is finally stable. As soon as top economists or a respected government official makes this type of declaration hold on to your hat, a downturn is just around the corner. Just ask Ben Bernanke. In 2004 he did just that and a few short years later the worst recession in history was upon us. There was Irving Fisher a prominent economist in the late 20's who declared the stock market had reached a permanent plateau, it would never go down again. We all know what happened in October '29.

In the Obama economy I doubt we'll hear any such talk - but that doesn't mean a financial disaster isn't just around the corner. Not much has changed in the structure of the economy since the 2008 meltdown. We are seeing a re-inflation of the real estate bubble which is exactly what we don't need. The Fed pump priming to re-inflate of the stock market has done little to nothing for the prospects of Main Street America. Besides higher taxes and the specter of the Obamacare boom being lowered on the fragile recovery not much has changed in the base economy. The American economy is still almost totally reliant on real estate - home ownership. There's nothing inherently wrong with home ownership, but you need good paying jobs to make it work. There just aren't enough of them.

The hiring that has happened in the past few years has been mostly low paying service jobs, not the type that can sustain suburbia or even the gentrified neighborhoods in the city. As well, there are  millions of kids sitting on billions in government student loans and low prospects of getting those good paying jobs they were counting on. As a result there will be a large delay in the next generation of home owners. According to the well known reactionary blogger Dennis Mangan this is indeed the next bubble to burst. A student loan bailout is on the way.

Is there a better way? Perhaps not, but there is a monetary theory called MMT that claims there is. MMT has fascinated me for years. They say Modern Monetary Theory was born when President Nixon took the U.S. off the gold standard. Since the 70's we have been using a fiat currency, currency that a government has simply declared to be legal tender, but is not backed by any physical commodity. Because fiat money is not linked to physical reserves there is always risk that it could become worthless due to hyperinflation or loss of confidence. In theory if we should lose faith in paper currency our dollars will no longer hold any value. For the government to insure that the fiat currency has some intrinsic value it demands tax payments in dollars. If this seems sketchy - it kinda is. But wait...

MMT theory states because our money is created by fiat, by printing press or a spreadsheet at the Federal Reserve the U.S. government can never truly run out. MMT says if properly managed our money should always retain value through all the inevitable economic ups and downs and inflation and unemployment would always be held in check.

 What do they mean by properly managed? It could be as simple as significantly raising government spending and significantly lowering taxes during economic downturns. Looking back over the decades we see how this has worked - or not.

In the early 80's the economy was terrible. Inflation was high. interest rates were high, government spending was low and taxes were very high. President Reagan oversaw a significant raise in government spending and a significant lowering of taxes. The economy recovered and sustained good employment and low inflation all the way through the 90's. There was the inevitable recession in the late 80's, but it was shallow and short. The Clinton administration enjoyed strong growth and low inflation as they embarked on a significant reduction in government/military spending. They also raised taxes. Still the economy was poised to cycle down in the late 90's and another small, short recession hit, merely proving downturns are normal. Bush II raised government spending and significantly lowered taxes and the economy recovered nicely just as the theory claimed. However, when the economy was humming in the Bush years government spending never moderated and taxes stayed low. When the credit market collapsed the country was in an inverse position according to the MMT theory and the great recession hit.

What has happened since? The great recession was deep and significant which according to MMT theory called for increase government spending. Obama obliged, government spending sky rocketed. On the other side Obama did not lower taxes - he increased them as well as significantly increased regulation which is a type of a tax. Much of the spending was unproductive and frankly wasteful (fraudulent) and only bred government dependence on food stamps and unemployment payments. This while regulation and often hostile anti-business overtures led to slow job growth and even slower economic growth. In short we have the mess we all see before us.

MMT also advocates the government directly hire the jobless during significant downturns so that unemployment stays very, very low. Simply giving out food stamps and unemployment checks is counter productive. Eventually those government created jobs (we'd presume infrastructure projects would be the focus of these jobs programs) would decrease as the private sector began hiring again. Inversely government spending would decrease. We would see higher progressive taxes as the economy boomed to keep inflation in check.

There is also a share of MMTers who advocate doing away with the payroll tax altogether. The lie that FICA is funding retirees now is only putting a huge drag on incomes and the ability for private business to hire. This is an idea whose time has come. What about the "deficit"? The government will never default on its payments to retirees due to lack of money, there is simply no such thing with an entity that issues the currency.

The downside of MMT is the over the top arrogance of it's advocates. These people are positing a theory - perhaps a very valid one - but you'd think that everyone else is crazy (mainstream economists and the Fed) and/or evil (Republicans and capitalists). They align with socialists and against capitalists at every turn. The hostility toward anyone with a different view is breathtaking. Deficit hawks are in for a special kind of wrath. They seem to hate Wall Street and CEO's, blaming the system the government has allowed to operate instead of the government officials who made it so. As if socialist government officials haven't contributed to the whole unstable mess. In short , MMTers do a very, very poor job of selling their theories.

There's a lot to consider, a lot to actually like about MMT. But I can't help but wonder why it is such a secret? Is it being taught in college? Is it holding conventions, writing books, marketing itself like the Austrian, Keynesian and Chicago School of economic theories?

If you can get past the arrogance MMT is fascinating.