The Center of the Universe

St Croix, United States Virgin Islands

MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

We need YOU!

MISSION:
To deploy an army of MMT proponents to respond to deficit terrorism on the web.
Go to offending articles. Neutralize flaws. Report back to home base.

MERIT AWARDS:
An MMT heart () will be awarded for each successful strike.

Please note, the contest has concluded, but the mission remains, please continue the battle!

HOW TO PARTICIPATE:
1. Sign up
2. Track down the deficit terrorists
3. Counter attack with comments on their websites
4. At the end of your counter attack, leave your mark on their website
        Your Name or Alias
        www.moslereconomics.com
        Counter Insurgency, Deficit Terrorist Unit
5. Report back to headquarters for review

If you do not sign-up AND report back to headquarters for review, the MMT will not be awarded.

If you need assistance, let the group know.
We will put out a call for back-up.

All appropriate comments properly signed out will receive MMT .

Leaders will be posted within the next few weeks.

Good luck to all that participate.

GO TEAM!

135 Responses to “We need YOU!”

  1. Charles Yaker Says:

    May I make a modest proposal that I have been attempting to follow. You might want to broaden the Mission. Often sites or email newsletters of Progressive organizations don’t offer a comments section but do provide a means of contacting them. I suggest people take advantage of these opportunities to disabuse these sites to the fallacy of the economics of the articles and positions they are presenting.

    To quote James Galbraith

    http://www.alternet.org/news/145401/why_progressives_shouldn%27t_fall_for_the_deficit_reduction_trap

    “That cause — in this case protecting Social Security and Medicare from predators on Wall Street — is a good one. But good political purposes don’t guarantee good economics. And, let me argue, if the economics are based, as they are here, on a false premise, then you can’t make the politics work in your favor.”

    Those organizations need to be told and comment sections are not the only way to reach them.

    Reply

  2. Digger Says:

    Charles,

    Good suggestion. Although they could probably not be called a “progressive organization”, most state and county Democratic organizations at least have folks that are sometimes openminded and obviously willing to be politically active. This March, I sent the text(with corrected apelling)of Warren’s Dallas address along with numerous other related links (like Galbraith’s In Defense of Deficits) and comments to the state and county Democratic leaders in Washington, Oregon, Nevada, Idaho, Montana, Wyoming, Montana, North and South Dakota. What little feedback I did get was overwhelmingly positive and only one person wrote and said not to send anything else. I wanted to do more states but grew tired of harvesting email addresses. Perhaps someone else might want to email other states.

    One never knows if seeds will hit fertile or barren ground.

    Reply

  3. The Center of the Universe » Blog Archive » MMT Contest – Update Says:

    [...] We need YOU! [...]

  4. Rodger Malcolm Mitchell Says:

    Heck, I do this all the time. Example: http://rodgermmitchell.wordpress.com/2010/05/27/committee-for-a-responsible-federal-budget/
    .
    Two of the worst debt-terrorists are the editors of the Wall Street Journal and the Chicago Tribune. They spew debt-fear garbage on a daily basis.
    .
    Chicago Tribune addresses:
    Bruce Dold: bdold@tribune.com
    Pat Widder PWidder@tribune.com
    Dodie Hofstetter: ctc-tribletter@tribune.com

    WSJ addresses:
    Almar Latour a.latour@wsj.com
    David Wessel capital@wsj.com
    Jason Zweig intelligentinvestor@wsj.com
    Jennifer Hoyt jennifer.hoyt@dowjones.co>
    John McKinnon john.mckinnon@wsj.com
    Jonathan Weisman jonathan.weisman@wsj.com
    Philip Izzo philip.izzo@wsj.com
    Wall Street Journal wsj.ltrs@wsj.com

    You also might try some columnists:
    Clarence Page: cpage@tribune.com
    David Greising: dgreising@tribune.com
    Gerould Kern: Gkern@tribune.com
    Margaret Holt: McHolt@tribune.com

    I write to these folks all the time. I also have a list of economics professors to whom I Email. They never answer. (A popular trait among debt hawks is not to answer anyone who challenges the popular myth), but maybe letters from lots of people will make a dent in the cement.

    Rodger Malcolm Mitchell

    Reply

  5. Vincent Cate Says:

    Could I get someone to checkout my “hyperinflation in MMT terms” for me?

    http://pair.offshore.ai/38yearcycle/#mmthyperinflation

    Reply

    Jim Baird Reply:

    Vincent –

    Check out Bill Mitchell’s discussion of the Weimar and Zimbabwe hyperinflations here:

    http://bilbo.economicoutlook.net/blog/?p=3773

    Briefly, both were massive supply shocks. There is no case I know of hyperinflation happening merely because of excess government spending or indebtedness.

    Reply

    Vincent Cate Reply:

    The $100 trillion note on my wall was not caused by a supply shock. You might argue that the trigger for the start of hyperinflation was a supply shock, or capital flight, or bond sale failure. But there needs to be feedback loop that includes printing money to get hyperinflation. A supply shock alone can not do that. Are there any other papers by MMT authors on hyperinflation?

    Reply

    Vincent Cate Reply:

    By “printing money” I mean “creating new fiat currency”. I am not a native MMT speaker.

    Tom Hickey Reply:

    Vincent, try these:

    Rob Parenteau, The Hyperinflation Hyperventalists

    Edward Harrison, MMT: Fear of Hyperinflation

    Edward Harrison, MMT: Hyperinflation in the USA

  6. Vincent Cate Says:

    Thanks. Even in all of these papers they really only address 2 cases of hyperinflation and say the US is different. If they are going to argue this way I think there are about 98 cases to go before you can even say the US is not like any of the previous cases, and even then that is not an airtight argument that the US is safe. MMT needs to be able to explain hyperinflation, because it has happened in the real world many times.
    Can anyone give me feedback on what I wrote?
    http://pair.offshore.ai/38yearcycle/#hyperinflation
    http://pair.offshore.ai/38yearcycle/#mmthyperinflation
    http://pair.offshore.ai/38yearcycle/#math

    Reply

    WARREN MOSLER Reply:

    see http://www.moslereconomics.com/mandatory-readings/a-general-analytical-framework-for-the-analysis-of-currencies-and-other-commodities/ under ‘mandatory readings’ for the definitive answer

    Reply

    Vincent Cate Reply:

    The only mention of hyperinflation is one sentence: “Hyperinflation is the condition in which the private sector no longer desires the currency unit (as reflected in the price level).”

    The end result of hyperinflation is the death of a fiat currency where nobody will take it. Hyperinflation is the transition period where the value goes down to eventually nobody taking it. This transition can take years but is amazingly hard to stop once started. The conditions that trigger the death spiral and the feedback loop of the spiral are something we should understand so that we can avoid them. Do you understand these?

    Since hyperinflation is a real phenomenon in fiat money a good theory of fiat money should explain it. Is there an MMT theory of how hyperinflation starts and why it is so hard to stop once it starts?

    Saying they are caused by supply shocks is not a full explanation. Plenty of fiat currencies survive supply shocks.

    Saying, “no longer desires the currency unit” is clearly the end result, but begs the question, “why?”. Why do people no longer desire some fiat currency units while still liking others?

    Nobody chooses to have hyperinflation, yet many countries have it. Why?

    Reply

    WARREN MOSLER Reply:

    the price level is a function of prices paid by govt.

    if tax liabilities are credible, the govt sets the terms of exchange when it spends, just like any other absolute monopolist.
    so hyper inflation comes from govt paying ever higher prices for the same thing, as in the case of Weimar, where the govt paid ever higher prices for the fx it needed to pay war reparations,
    with deficit spending of maybe 50% of gdp annually.

    and if tax enforcement ceases, the currency goes completely worthless

    and note the section in the paper that explains how an income tax doesn’t drive the model unless the tax is also on imputed income.

    all the south american inflations have been traced to govt indexation and the govt paying ever higher prices for the same thing, for example

  7. Vincent Cate Says:

    German war reparations were about 11.8% of the German government’s budget in 1921:
    http://www.fff.org/freedom/fd1005e.asp

    The US is spending a higher percentage of its budget on overseas military bases and wars. So if that is all it takes, then the US should be worried.

    You say, “tax liabilities are credible”. What fraction of the budget needs to come from taxes for these tax liabilities to be credible? Bernholz says more than 60% of the budget needs to be from taxes. Do you agree?

    Hyperinflation and indexing go together, but even high inflation and indexing go together. You just can’t sit down with each employee and work out a new salary every week. Or make up new prices for every product. So people always end up indexing somehow with high inflation. In the late 70s there was a lot of indexing, yet eventually inflation went down. And today all kinds of government things have COLAs (cost of living adjustments) built in, but they are not causing high inflation. So it seems indexing is more a result of prices going up than the cause of prices going up.

    Reply

    WARREN MOSLER Reply:

    The total german deficit was higher. if the US started spending an additional $150 billion a month on fx purchases that was to continue indefinitely that would likely trigger a dollar collapse that would trigger an accelerating inflation, in my humble opinion.

    There is no reliable % of the budget that gives you the right level for taxes. It depends on all kinds of things- credit conditions, trade gap, propensities to consume, etc.
    All you need to do is count bodies and look at prices and what’s driving them to get a handle on whether fiscal is too tight or not.

    The inflation of the late 70′s was ‘broken’ by the supply side, particularly the dereg of nat gas in 1978

    Reply

    Art Patten Reply:

    @Vincent Cate,

    Also matters immensely what currency German reparations (and US military expenditures) were (are) denominated in (gold and fx for Germany, USD for US).

    Reply

  8. beowulf Says:

    The US is spending a higher percentage of its budget on overseas military bases and wars. So if that is all it takes, then the US should be worried.

    Err, Germany wasn’t paying reparations in their own currency (“Any monetary obligation due by Germany arising out of the present Treaty and expressed in terms of gold marks shall be payable at the option of the creditors in pounds sterling payable in London; gold dollars of the United States of America payable in New York; gold francs payable in Paris; or gold lire payable in Rome”). What’s more the French still had troops on German soil as an encouragement for the Germans to cough it up. Finally, unlike the United States today, after the Versailles Treaty Germany had no overseas economic interests to protect nor the military strength to do so.
    http://www.firstworldwar.com/source/versailles248-263.htm

    Reply

  9. Vincent Cate Says:

    >Err, Germany wasn’t paying reparations in their own currency [...]

    It is true that debts in foreign currency become a much bigger problem after you destroy your local currency and local economy with hyperinflation. But given that it was only 11.8% of the government budget in 1921 you can not really say that is what triggered the hyperinflation. Yes, once hyperinflation starts, having debts in foreign currency does contribute to the problem. However, many governments, including the US, have many budget items that are bigger than 11.8%. But why does hyperinflation start for some governments and not others?

    Reply

    WARREN MOSLER Reply:

    I think it was 11.8% of gdp, on top of the rest of the budget deficit. I’d heard the total deficit was much larger?

    Reply

    pebird Reply:

    Reparations are big problem because your currency becomes hostage to FX traders – they know you need to accumulate FX, the debt is non-negotiable (unless you want to go to war) so a carry trade environment is formed.

    Exactly what happened to Weimar – in fact, whether due to incompetence or to destroy a liberal government, the German central bank put in place policies that encouraged speculation, by borrowing in order to get the FX. Who knows, maybe they were so pissed off by Versailles that they didn’t care if they trashed their currency.

    Reply

  10. Tom Hickey Says:

    But why does hyperinflation start for some governments and not others?

    That is a good question. I am not an economist, so I can’t give an expert answer to it. But, to my knowledge, economists in general have not answered it either, since there is no operational definition of hyperinflation, e.g., when ordinary inflation becomes hyperinflation. In fact, even the ordinary concept of inflation is somewhat vague and rather ambiguous, since it is difficult to define operationally, other than somewhat arbitrarily and tentatively.

    It seems to me that historically hyperinflations have generally resulted from the currency losing credibility (no one wanting to hold it overnight) because the government loses credibility and creditability. All money is a form of credit, and state money is a liability (IOU) of the state.

    This can happen for a variety of reasons, from bad management to exogenous shock. Hyperinflations can even happen locally or regionally through exogenous shock due to extreme supply contraction force prices up astronomically and can result in predation. At such points order must be restored through either increasing supply quickly or using force to quell looting and predation.

    In this political view, hyperinflation is a symptom of the impending collapse of the state, i.e., it is a symptom of the loss of the ability of the existing government to govern in such as way as to provide a credible backing for state money. When this happens, society starts to break down both politically and economically, and hyperinflation is a financial symptom of increasing political and economic instability in the direction of anarchy.

    At this point there must be an imposed solution, or chaos will result. In general what it means in real terms is that to resolve the problem the society has to accept a lower standard of living, at least for a time, and adoption of a new political regime/policy.

    Reply

  11. Vincent Cate Says:

    It is not that there are no definitions of hyperinflation, it is that there are too many. :-) People sort of agree that it is when inflation rates are measured in less than yearly time periods, but different people use different cutoffs.

    I actually feel I understand hyperinflation, the thing I am trying to get is what is the best way to explain it in the MMT language. To me it looks like the MMT people have not really gotten a good explanation in MMT terms that fully describes the mechanism and treachery of the hyperinflation problem.

    Yes, hyperinflation often happens when a state or empire is collapsing and when confidence is lost in their currency. To me the US is an empire, since it has collected an inflation tax on other states, which is about to collapse. If the dollar stops being the reserve currency, which countries should do so they stop paying the inflation tax to the US, then the dollar collapses. If other countries stop taking the paper dollars and sending the US oil and products, then the US is suddenly poor.

    Reply

    Tom Hickey Reply:

    If other countries stop taking the paper dollars and sending the US oil and products, then the US is suddenly poor.

    That is what MMT’ers also say. MMT holds that a monetarily sovereign nation that is the monopoly provider of a nonconvertible floating rate currency is not financially (operationally) constrained. However, there are real constraints, domestic and external. The real external constraint is the desire of other nations to continue to accumulate the home nation’s currency, and the domestic real constraint is the productive capacity of the economy to meet effective demand resulting from creation of state money. A nation is financially constrained if it borrows in another currency.

    MMT always acknowledges that the only way a nation can enjoy the real terms of trade benefits associates with an external trade deficit (more real goods and services entering the nation from abroad and going the other way) is because, in a macroeconomic sense, the foreign sector desires to accumulate financial claims (bits of paper) denominated in the local currency.
    It is clear that this desire can change and if it disappears then the flow of imports into the economy will contract as quickly as the desire to accumulate the financial claims contracts. It is surely a constraint on citizens living in the local economy. One day they are enjoying lots of imported gadgets and the next they are being forced to go without them (in a macro sense). That is an external constraint. The desires to accumulate financial claims in the local currency are the desires of foreigners – and can change.

    — Bill Mitchell, In austerity land, thinking about fiscal rules

    Reply

    WARREN MOSLER Reply:

    Bill is spot on, of course.

    Meanwhile, we keep striving to limit imports/encourage exports/reduce our trade gap in every way we possibly can while the rest of the world desires to send us a whole lot more than they are sending now.

    Reply

    Tom Hickey Reply:

    Ravi Batra shows how historically imports flow to the imperial center from the periphery and the periphery accumulates the currency of the center in exchange for its resources and labor. He claims that the US is a global financial/business empire. See The New Golden Age, chapter 6. So enjoy it while it lasts, empires don’t last forever, since this relationship is unsustainable in the long run.

    WARREN MOSLER Reply:

    wrong. have you gone through any of the ‘mandatory reading’ on this website? the 7 deadly innocent frauds? doesn’t read like it.

    Reply

  12. Henry Says:

    Very interesting, lengthy article on Neoliberalism in connection with the Honduras coup:

    Hillary’s Bones–A Coup Tutorial

    [...] What is neoliberalism and why should we care? We’re talking about a coup, right?

    Answer: The coup in Honduras is the visible top of an iceberg. Neoliberalism is the much larger mass holding the visible part out of the water.

    The L-Word

    Neoliberalism is not the central thesis of this pamphlet. Describing it is, however, necessary to discern the motives of the US government and of the international business class that has the greatest influence on it.

    Unraveling a coup d’etat is kind of a detective story. The first thing the detective has to figure out in a detective story is “where am I? How do things generally work around here?”

    Like detective stories, coups happen in settings, and not just physical settings, but places that operate by their own logic. In a good P. D. James novel (a redundant phrase in my opinion), her main character has to first figure out that social hieroglyphic that operates under the surface and really moves the plot along. Our setting is neoliberalism.

    The term “neoliberalism” is not common among Americans, but it is well known and well-understood outside the US. It confuses people from the US because the popular understanding of the word “liberal” is one half of the way we are taught to think about politics. Our political world is embodied in the “liberal vs. conservative” dipole, which in political discourse represents a very narrow range…

    Read the rest at:
    http://www.feralscholar.org/blog/index.php/2010/09/30/hillarys-bones-a-coup-tutorial/

    Reply

  13. Vincent Cate Says:

    Warren,

    I have gotten into a similar discussion over on bilbo and there is a question of what MMT theory really is. If people stopped buying US government bonds and over the next year cashed in $5 trillion in bonds, for which the government created a new $5 trillion in fiat money, would that be inflationary? If so, you agree there is no hope to increase taxes enough to compensate, right?

    Reply

    WARREN MOSLER Reply:

    first of all you can’t ‘cash in’ bonds with the govt. but you can borrow against them, which is much the same.

    second, demand pull inflation comes from spending, not just from shifting your assets from bonds to cash.
    so if, for any reason, people just started spending all their savings including their pension funds, etc. (which is pretty much impossible, but that’s a different point) yes, the excess spending could drive up prices which is what we call inflation.

    but even then, if govt refused to pay the higher prices, and constrained the prices it is willing to pay to current prices, the price increase would be temporary and prices would come back to the level which govt is willing to pay.

    that’s how any ‘pure’ monopoly works.

    Reply

    Tom Hickey Reply:

    Vincent, in my view people buy tsy’s to save at interest. In the case of no-bonds, that avenue would be closed, and would have to find other assets for the purpose of gaining a return. So what can be expected to change is the composition of assets rather than increased propensity to consume. There is nothing to suggest that propensity to consume would increase owing to increased liquidity. For example, the Fed has been increasing liquidity (base money) like mad through QE, and the excess reserves just sit there at minimal interest, despite the warning of inflationistas that this would lead to hyperinflation very quickly. Contradicting that, the yield curve remains relatively flat, and disinflation/deflation remains the concern rather than inflation.

    Ideally in this view, if Congress decided to go to no bonds, they would also have the wisdom to disincentive economic rent and incentivize productive investment, so that the shift in asset composition would be toward productive investment instead of non-productive asset appreciation.

    Productive investment increases incomes, which increases demand for the additional supply. This grows the economy in a way that everyone (capital and labor) participates, creating greater national prosperity for all. Conversely, economic rent gives a disproportionately large slice of the pie to those who are non-productive and, in effect, parasitical on the economy through gaining claims on real resources without really earning it.

    Reply

  14. Vincent Cate Says:

    If a bond is due in 3 months, then in 3 months you can give it to the government and they must give you cash. That is what I mean by “cash in”. So my question is, if $5 trillion worth of bonds came due in the next 12 months, and the government created new fiat money to pay each of them off, would that cause inflation? So I am saying something like worldwide holdings of US government debt goes from $12 trillion to $7 trillion over the next 12 months, and money goes up by $5 trillion.

    Do you think that government could reduce spending enough to compensate? Do you think that government could increase taxes enough to compensate?

    Historically this seems to be the situation that starts off hyperinflation. People stop buying the government bonds and they have to print much more money.

    Reply

    WARREN MOSLER Reply:

    when bonds come due the fed simply debits the holder’s security account and credits his reserve account. (net financial assets of ‘the economy’ stay the same. no one gets richer)

    so reserve balances would increase by 5 trillion which would have no effect whatsoever unless those funds somehow caused spending to increase.

    historically that’s how fixed exchange rate regimes blow up. see ‘exchange rate policy and full employment’ http://www.epicoalition.org/docs/exchange_rate_policy_and_full_em.htm

    Reply

    Tom Hickey Reply:

    Vincent, I don’t think that your hypothetical works. You are assuming that those funds would flow into consumption, and there is no indication that they would. Why would this increase the propensity to consume? It seems most likely that the funds would simply be shifted into other assets in expectation of return, e.g., foreign bonds, domestic corporates, and equities. See my comment under #13 at 1:21.

    Reply

    Vincent Cate Reply:

    When people get worried that the value of a currency is going to go down they get their money buy real things. So “cashing in bonds” and spending to buy anything real do seem to go together. This might be buying gold, or oil futures, or farm land, or a car, food, guns, solar panels, etc. If they fear their money or bonds will be going down in value, they want to get something really safe.

    Hyperinflation is a real thing. It happens again and again. Nobody chooses it.

    Reply

    Vincent Cate Reply:

    By the way, international commodities went up like 8% last month. Not at an 8% annualized rate, but 8% in one month. I suspect that, like China, many people are rushing to buy real things with their dollars before the value goes down more.

    WARREN MOSLER Reply:

    to some degree. also our own pension funds go on buying sprees called ‘passive commodity strategies’ and also, commodities are inherently volatile and relatively illiquid.
    also, the euro bounced back as discussed/forecast on this website from it’s low of about 119 due to the new austerity measures, reversing rising deficits in the euro zone, which is tightening up that currency.

    for now, at least, it’s just a relative value shift but it could work it’s way through the cost structure. that’s called ‘cost push’ inflation and it can happen regardless of the rate of unemployment.

    Tom Hickey Reply:

    Commodities rise for two reasons, the second a function of the first. The first is use, rising demand relative to increase of supply. That is only going to increase as large nations like China, India, and Brazil come on line. The second is speculation. The fact that demand is increasing relative to supply is not lost on investment managers, and they are turning commodities into investment vehicles. This is resulting in hoarding in some areas.

    China especially has a voracious appetite for stockpiling resources, as well as locking in future access.

    http://www.independent.co.uk/news/world/asia/fears-of-chinese-land-grab-as-beijings-billions-buy-up-resources-2095451.html

    WARREN MOSLER Reply:

    that’s happening now with gold for sure. but it’s not the actual cause of actual hyper inflation. Just a one time shift in prices.

    inflation is a continuous process, which requires support of the govt of issue. again, see the 7 deadly innocent frauds thanks

    Sergei Reply:

    “By the way, international commodities went up like 8% last month. Not at an 8% annualized rate, but 8% in one month”

    Vincent, you cann’t be serous about that can you? Commodities are traded as futures and not on any spot market. And even in the spot market there can be a fair bit of speculation. And so what?

    pebird Reply:

    Take a look at Michael Hudson:

    http://michael-hudson.com/2010/10/why-the-imf-meetings-failed/

    Good discussion on how international dollar flows are finding their way into commodities.

  15. beowulf Says:

    What Vincent isn’t tracking is something that Peter Bernstein is quoted as saying in the paper Warren linked to above:

    The dollar standard has replaced the gold standard in international finance, a role that it has served admirably in recent years. This assignment has also benefited Americans, because foreigners have been happy to accumulate the swelling numbers of dollars that we have been transferring to them in return for a burgeoning supply of imported goods and services.

    Reply

  16. Vincent Cate Says:

    I do fully understand what Peter Bernstein is talking about. Being able to print pieces of paper with dead men on them and get real supertankers full of oil is a huge win to America. The ability to impose an inflation tax on the whole world is a huge win to America.

    However, because the rate America is printing money now it hurts the rest of the world to much, it is going to come to an end. As it ends, America is going to hurt really badly. This is really the theme and intro to my website:

    http://pair.offshore.ai/38yearcycle/

    Reply

    Tom Hickey Reply:

    This is actually good news for the US and the planet if you believe in negative externalities like pollution and climate change. It will provoke the shift to true price, conservation or existing resources, and technological innovation as the age of oil comes to an end. This will greatly increase productive investment and incomes. It is just what the US needs to address structural issues resulting from globalization and the transition from a chiefly industrial economy.

    The real issue is decreasing EROEI (energy return on energy invested). See An EROERI Review at The Oil Drum (Mar 18, 2008).

    This is a global supply-demand (real) issue rather than a financial one, and it is not going to undermine the value of the dollar as the world’ has to adjust to a new energy reality. The world is going to adjust to energy constraints that will affect the price of just about everything. Price is the way the market rations scarce resources. As price changes, investment and innovation responds to it creatively.

    Reply

    Tom Hickey Reply:

    The ability to impose an inflation tax on the whole world is a huge win to America.

    You can look at as the “tax” that the rest of the world has to pay to participate in the American business and financial empire. US has the largest GDP at nearly 15T and the second largest is less than 2T. The US also maintains the largest military by far to preserve world order. This inflation tax will be in place for some time to come. It’s the cost of doing business.

    Reply

    Vincent Cate Reply:

    The big inflation tax is paid by countries that hold large dollar/treasury reserves. There is no requirement to hold such reserves to trade with the US. One could have reserves as gold or silver or a bunch of other currencies. With forex markets you can trade anything for dollars anytime you want to. Clearly I don’t really know, but I think the world is tired of giving America such power. We shall see.

    Reply

    Tom Hickey Reply:

    For continued access to the American market, the ROW has to provide the capital account surplus that corresponds to the current account deficit. Anytime the ROW decides it doesn’t want access to the American market, it can just stop exporting to the US and absorb the resulting excess production elsewhere, or else contract. It’s a voluntary choice. We’ll see, but from what I am reading the ROW is freaked that the American consumer spending may be weak for awhile. If the US economy is weak, the ROW feels the chill.

    http://english.caijing.com.cn/2010-09-25/110529731.html

  17. Vincent Cate Says:

    I don’t see why you have any linkage between other countries paying the inflation tax by holding lots of US dollars and trading with the US.

    I have started a new blog at http://howfiatdies.blogspot.com/ and maybe this discussion should move there (if anyone wants to keep at it).

    Reply

    Tom Hickey Reply:

    Countries trading with the US get paid for their stuff in dollars. They have to save those dolars, spend them on dollar denominated items (oil is denominated in dollars), or exchange the dollars for another currency, in which case some other party gets those options.

    They can also use dollars for trading among themselves. For example, US $100 bills are a favorite form of currency, and they are exchanged by the suitcase-full throughout the world. :o

    Reply

    Vincent Cate Reply:

    Money can be used for trade and also as a store of value. For trade you just need small amounts, maybe a weeks worth of money. It is the guys with a trillion dollars reserve that pay most of the inflation tax. Nobody needs to do that, they could use gold as reserves. With gold reserves there is no inflation tax.

    Reply

    WARREN MOSLER Reply:

    what do you call it for the oil producers who loaded up in 1980 at over 800/oz and even today would need a price of maybe 3,000 to have kept up with tsy secs available back then?

    looks to me like for that short period of time- 30 years- those gold holders paid some kind of inflation tax?

    Tom Hickey Reply:

    Right. Gold still has not reached its old high adjusted for inflation. Just like now the public was bailing in to a “sure thing.”

    pebird Reply:

    China could not reasonably hold its reserves in gold. Their demand for gold reserves would drive the price of gold through the roof and they would be in a bind similar to that they are in today. They would be held hostage by their excess reserve position and their desire to maintain its value while keeping the value of their currency down.

    Only because of the USD position as reserve currency (e.g., accepted as final payment in the world to settle debts) can China maintain such a high external surplus and keep their currency down – they would have been whipsawed if they tried to use gold as reserves.

  18. Tom Hickey Says:

    t is the guys with a trillion dollars reserve that pay most of the inflation tax. Nobody needs to do that, they could use gold as reserves. With gold reserves there is no inflation tax.

    Yes, China could store its dollar holdings in gold, but that would mean that the US would not have a capital surplus to offset its CAD, unless others were willing to save dollars in a corresponding amount, and the CAD would have to shrink, the last thing that China wants. This is why the US has an arrangement with oil producers to buy their oil in dollars and for them to save in dollars by purchasing tsy’s. You scratch my back and I’ll scratch yours. BTW, the world already tried the hoarding gold route. It’s called mercantilism, and it didn’t work out so well. That is why we now have a nonconvertible floating rate regime and free trade and free capital flow.

    Trade is always balanced even when it is “imbalanced,” i.e., some countries are net importers and some net exporters. The balance is maintained by floating exchange rates and capital flows, and it works reasonably well in that world trade is running pretty smoothly. Right now, the US is needlessly concerned about job leakage through net imports, but this is because the US is not addressing the unemployment and output gap domestically through fiscal policy in an appropriate fashion.

    Moreover, the external ownership of the national debt (about a third) is part of the US capital surplus account accruing from trade. The US gets to enjoy the material satisfaction of the imports at the cost of the interest, which is to some degree countered by the “inflation tax.” Other countries are happy, too, since they can build their industrial base faster and gain access to dollars for resources like oil.

    Reply

  19. Matt Franko Says:

    “the world already tried the hoarding gold route. It’s called mercantilism, and it didn’t work out so well. That is why we now have a nonconvertible floating rate regime and free trade and free capital flow.”

    Tom I really believe FFNC is the best way to go. I also think that modern Information Technology is/was crucial in allowing the world to get off the the archaic gold std. (I often wonder if it was not a coincidence that we went off gold about the same time that the first Olympics was broadcast live in color via satellite from Munich at that time). The global near real time situational awareness that modern IT provides takes a lot of the previous perceived geopolitical risk out of the equation, increases overall trust, and reduces the need for gold as an ‘equalizer’.

    We just need better people implementing the FFNC.

    Resp,

    Reply

  20. Vincent Cate Says:

    I just got asked to stop talking about hyperinflation on bilbo. Before getting asked to stop here also, I would rather move. So if anyone wants to talk hyperinflation more, lets move the discussion to: http://howfiatdies.blogspot.com/

    Thanks.

    Reply

    pebird Reply:

    Visited your site – I don’t like posting comments where you need to register with one of these services – sorry, it just doesn’t work for me. I don’t know if that is the default with Blogger, but maybe consider allowing anonymous or handle/e-mail comment posting.

    Good luck with dying Fiat. I want to buy a 500 when they show up in the US (yuk, yuk).

    Reply

    Vincent Cate Reply:

    It defaulted that way but I have changed it so that anonymous can post. Thanks for the info!

    Reply

  21. Vincent Cate Says:

    Warren, the “inflation tax” is where the government takes value from existing paper money holders as more new paper money is printed. You can not really do this with gold, as it is not printed like paper money.

    When gold was around $800 back around 1980 I think the market was getting ready to write off the dollar. When countries get to such high inflation they often go on to hyperinflation. Now the US was able to get the inflation under control (Volker putting the government interest rate up to 20% and also selling some of their gold reserves at the high price to reduce the number of dollars outstanding).

    Anyway, buying gold at the peak would not have been the best investment, but not because the government is collecting an inflation tax on gold. They do get a sales tax, and a capital gains tax (collectors items at 28%). So they do get a cut from gold investors, just not an “inflation tax”.

    http://en.wikipedia.org/wiki/Inflation_tax

    Reply

    WARREN MOSLER Reply:

    the govt doesn’t promise anything about the rate of inflation, and holding dollars is voluntary. yes, there can be a cost for holding dollars due to ‘inflation’ just like there’s a cost for holding gold and cars and most anything else (storage charges, insurance, etc) and anyone can go buy all the gold or anything else they want.
    what more is there? if you like gold, go buy it and praise the nation that lets you do it and doesn’t (yet) tax it

    nor do countries ‘often go on to hyper inflation’ without a deliberate policy to do so.
    nor did volcker bring down inflation. it was the supply shock from the deregulation of nat gas in 1978 the way i remember it. if anything volcker made it worse and caused it to linger for a long time

    Reply

    Vincent Cate Reply:

    Right, given that there are no guarantees that dollars will hold their value, and they are making like a trillion new dollars each year, we can expect the value to go down. Once investors see and understand that the dollar is going down, they will leave the dollar for commodities, gold, silver, or anything else real that they might need. Then the dollar will go down faster…

    Are you aware of any country that had a deliberate policy of hyperinflation? It is my understanding that circumstances always got out of control. Nobody buying bonds, big deficit, bonds coming due, so lots of money printing. Can you reference one intentional case of hyperinflation?

    Just about all economists I have seen credit Volker with getting inflation under control. The previous Fed chairman had interest rates lower than the inflation rate, so it was a win for people to borrow money so they had to keep printing more and more. He put interest rates above the inflation rate, and that reduced the money creation the Fed was doing.

    Reply

    Vincent Cate Reply:

    Also, the government debt now is so large that they clearly could not pay 20% interest on the debt. So the Fed will not be able to raise the interest rates and save the day this time.

    WARREN MOSLER Reply:

    they can pay any interest rate they want on the debt. paying interest is necessarily nothing more than crediting accounts at the fed

    Sergei Reply:

    The banking system can generate much more dollars for you. Even worse. It does not need any dollars to drive up the prices of commodities, gold included. It is as simple as that but you love for gold outshines any critical arguments.

    WARREN MOSLER Reply:

    the price of gold reflect relative value.

    markets reflect how humans value things, continuously.

    Matt Franko Reply:

    Vincent,

    “the government debt now is so large that they clearly could not pay 20% interest on the debt”

    Dont forget the other side of the Income Statement, a 20% policy rate would also increase tax receipts so the deficit would not just move in the one direction of increased withdrawls. They could do this, but of course it does not look likely in the face of the current deflation threat, US policymakers mainstream approach is to keep rates low to fight deflation, appearing ignorant of the fiscal effects/options.

    Resp,

    WARREN MOSLER Reply:

    unless the desire to not spend dollars goes up faster (aka demand leakages).
    that includes dollars that go into taxed advantaged savings like pension contributions and income, etc.

    the latin american inflations were all driven by indexation policies. whether or not they knew that would lead to run away inflation I can’t say.
    germany’s great inflation was entirely policy driven.

    It doesn’t come from ‘nobody buying bonds’ but from over spending relative to taxing, and other policy that causes the govt to keep paying more for the same thing.
    the price level is ultimately a function of prices the govt is willing to pay.

    thought you said you read through the papers on this website???

    ‘just about all economists’ don’t understand actual monetary operations. hence this website.

  22. Vincent Cate Says:

    Sergei, the dollar is dropping fast and international commodities traded in dollars are all going up fast. Dollar is down like 13% against other paper money, which is also printing fast. The real value is down even more, so commodity prices go up. Eventually people will say “there is an oil shock” and blame inflation on the price of oil, but the problem really is due to each dollar being worth less as they print more.

    http://quotes.ino.com/chart/index.html?s=NYBOT_DX&t=&a=&w=&v=dmax

    http://www.crbtrader.com/data.asp?page=chart&page=chart&sym=CRY00

    Reply

    Sergei Reply:

    Vincent Cate, fx-markets are even more obscure than commodities markets. But how about the price of labour that a dollar can buy? How does it compare to your gold argument in terms of economy? Shall we finally start talking real stuff?

    Reply

    Vincent Cate Reply:

    Ok, labor prices. How about this. If $100 US is converted to yuan it can buy a worker for 1 month. But $100 in the US can not get nearly 1 month of labor. So the exchange rate will eventually adjust and American workers will be paid more like Chinese workers.

    Reply

    Sergei Reply:

    Vincent Cate, so you’d better buy yuan, not gold.

    Beside this contradiction, how many people in the US care about yuan exchange rate? Apart from a bunch of bankers and economists nobody gives a … about it. And there is a long list of countries which would be happy to replace China, should it revalue.

    You are simply making up arguments to prove your position. In psychology it is defined as cognitive dissonance and what you do is one of the most primitive reactions of brain to mental discomfort, i.e. selectively filter arguments which justify pre-conditioned belief.

    WARREN MOSLER Reply:

    the currency is a public monopoly and the monopolist is necessarily price setter
    in other words, policy, like keeping your currency week, can sustain relative compensation differences on the low side.

    Tom Hickey Reply:

    So the exchange rate will eventually adjust and American workers will be paid more like Chinese workers.

    Vincent, with free markets, free trade and free capital flows, to the degree that labor is fungible, then this is the inevitable consequence. Eventually the price of labor will be global, just like other commodities. And it goes beyond factory workers.

    My wife who does eBay just told me a few seconds ago that someone in China has just entered the market and undercut her price on a popular item by two thirds and the shipping cost is the same.

    Westerners are traveling abroad in increasing numbers for medical and dental care. My cousin is having a hip replacement and the doctor asked if he had insurance. When he answered that he did, the doctor told him that the operation would cost about 60K in the US, and the if he didn’t have insurance, the doctor said he would recommend considering India, where the cost is only ~17K plus travel.

    It’s happening.

  23. Vincent Cate Says:

    My position is that printing more money makes individual units worth less. When fiat money is being printed fast it is better to own gold or silver. There have been many many countries that have experimented with printing money. History has confirmed my position over and over again.

    So while the yuan will probably go up relative to the dollar, they are printing yuan too, so I also see the yuan going down relative to gold.

    I have no mental discomfort as I watch the value of my gold and silver go up. I worry for the future of my friends and family in the US.

    Do you see anything in what I have written that you can show to be wrong?
    http://pair.offshore.ai/38yearcycle/

    Reply

    WARREN MOSLER Reply:

    spending supports prices, not quantities of selected monetary aggregates.

    Reply

    Tom Hickey Reply:

    Vincent, even if you should turn out to be correct, why aren’t you concerned about the government confiscating gold again. Holding gold didn’t turn out so well for people at the time of the Great Depression. Well, maybe this time, they will just put a tax on it instead of confiscating it outright. Why do you expect things to be different this time around?

    Reply

    Vincent Cate Reply:

    I left the US and renounced my citizenship. So they have no claim on me or my gold.

    I sort of think gold will be the international settlement currency but within countries they might still use paper.

    But if things really fall apart, the central government has the most to lose. Right now they have amazing power because they can print money, but when that money can no longer buy employees or voters, they have much less power. I think there is a very real chance that the US falls apart like the USSR did (I know that sounds crazy, but I think it could happen). The constitution that the states contracted to is nothing like what the central government actually does today.

    Reply

    beowulf Reply:

    I left the US and renounced my citizenship. So they have no claim on me or my gold.

    But if things really fall apart, the central government has the most to lose.

    You’re taking an awful lot for granted. If things really fall apart, the value of your gold (or oil or food) is measured in the number of guns required to liberate it. And no one has more guns than Uncle Sam.

    Tom Hickey Reply:

    Vincent, you are taking the position of Schiff, Mish, Friedman, etc. According to MMT, these people come to wrong conclusions because they don’t understand how the modern (post-1971) monetary system works. MMT lays out how it works in operational terms. If you don’t agree with that, then there is really no further discussion, because according to MMT this is operational reality, i.e., the facts. When parties disagrees over the facts, debate ends.

    As far as theory goes, assumptions are hypothetical. Those are in dispute. We are not going to resolve them here on this blog, since that is not its purpose. Basically, you come to your conclusions and place your bets.

    I look with interest at cycle theories such as you cite. However, I regard them as only one factor to be taken into consideration. One guy I thought had a good cycle theory was Henry Wheeler Chase, whom Larry Williams later popularized. Any one remember Chase’s letter? I also like Ravi Batra’s historical cycles based on the work of P. K. Sarkar. But cycle are rather loose matrices that rarely give precise information unless one adapts them to very short term technical analysis. I was just talking last evening with a bond trader friend and he has come up with a propriety system he uses successfully. But it is day-to-day, about three day max. He has spent a lifetime studying technical analysis and his conclusion is that it is not possible to forecast trends accurately longer than this.

    Not everyone in gold is there for the same reasons. I recommended bailing on RE in the late second quarter of 2006 when I saw the second derivative weakening. Then I recommended closing out stocks in the summer of 2008 and going to gold in anticipation of the GFC. I am calling gold a hold at this point. It is overbought IMHO; hence, too much risk to buy at this level. But as long as momentum is strong, upside risk precludes going short yet. All things remaining equal, I would likely call gold a buy after a significant pullback consolidates. I have explained elsewhere why I think that demand for gold will generally increase with globalization, and it doesn’t have anything to do with inflation. The risk now is deflation and instability, and gold is a hedge against that, too. (Disclaimer – I am not investment advisor and only interact with friends on an informal basis.)

    However, I recommend holding real assets instead of financial assets with an emphasis on productive assets. I view gold more as a financial asset instead of a real asset. Holding (hoarding) gold is essentially non-productive. Tradables with real utility are also recommended as investments, but only if one knows the field and market well. Trade (distribution) serves production. People should be involved in productive/distributive endeavors and putting their assets there instead of “saving.” In my book saving that is non-productive is hoarding and burying one’s talents. It is reactionary and uncreative. Obviously, building working capital is not hoarding in this sense.

    Hyperinflation is always a possibility even on a gold standard or whatever. This is what “printing money” means. There is nothing preventing a country from printing paper, or debasing its metal in the case of coinage. History is full of such examples.

    Reply

    Vincent Cate Reply:

    Perhaps I don’t understand something in MMT. I have written my understanding and nobody has pointed out any errors with it:

    http://pair.offshore.ai/38yearcycle/#chartalism

    I also wrote up hyperinflation in MMT terms:
    http://pair.offshore.ai/38yearcycle/#mmthyperinflation

    There only point of contention seems to be if the government selling bonds has a temporary reduction in aggregate demand (so it is sort of like taxes in reducing demand, but only for as long as the bond is out). I think at least one MMT author says that bonds do reduce demand (or delay or postpone it). I think the historical evidence is that it clearly does.

    The argument that bonds do not do anything is that someone could theoretically use their bond as collateral for a loan, and so use it to get money. The problem with this logic is that in practice people who want to spend money sell their bond instead of borrow against it. The reason is that they would pay more interest on the borrowing than they get on the bond, so they are worse off to do that. So in the real world, bonds do reduce demand.

    Think of China with $1 trillion dollars. If they give it to the Fed for some bonds, they can not spend it and demand is reduced. If their bonds come due and they get the cash (or have a credit to their checking account) then they can spend it. In their case it seems as the bonds come due they are buying up large parts of Australia and Africa. This shows up as an increase in demand and raises prices.

    The other way, imagine China tried to sell all their $1 trillion in bonds. The value of bonds would crash, unless the Fed bought them. And the historical evidence is that if the central bank buys huge quantities of bonds (monetized the debt) it causes inflation.

    Theoretically China might be able to buy companies in Africa or Australia using their bonds. But in practice, the shares in companies, the farm land, the oil rights, etc were for sale for dollars, not bonds.

    To me MMT is a very different way of thinking and describing things, but at the end of the day MMT theory has to match the same reality. Since monetizing huge amounts of debt causes inflation in the real world, it needs to in MMT as well. In MMT terms this can be explained as bonds delaying aggregate demand and when the government buys bonds it releases that demand.

    Reply

    WARREN MOSLER Reply:

    ‘monetizing’ the debt does nothing but change the duration of outstanding govt liabilities.

    doesn’t seem like you’re quite yet qualified to be making your assertions until you get a better grasp of monetary operations?

    Tom Hickey Reply:

    In MMT terms this can be explained as bonds delaying aggregate demand and when the government buys bonds it releases that demand.

    Vincent, MMT says that bonds or no bonds makes no difference to nongovernment net financial assets. This also makes virtually no difference to liquidity, since tsy’s are highly liquid and virtually the same a cash.

    The difference is the interest payment, and the interest on bonds increases nongovernment net financial assets, potentially increasing nominal aggregate demand if it is consumed instead of saved. So bonds/interest potentially increase NAD when held by nongovernment. But when the Fed buys bonds for its balance sheet, interest on the bonds goes to government, so that nongovernment net financial assets are reduced, and NAD is also reduced.

    WARREN MOSLER Reply:

    China buys tsy secs because they don’t want to spend their dollars. if the did buy something, whoever sold to china would get their balances, and they he can spend if he wants, or not spend and buy tsy secs. etc. no one has to spend, and tsy secs don’t prevent anyone from spending. to some extent the term structure of rates might deter spending, but higher rates shift interest income from borrowers to savers, so higher rates means total interest income in the economy increases faster than it’s taken away from borrowers, because the tsy is a net payer of interest. Whether the interest income channel offsets or not any differing propensities to spend between borrowers and savers is a subject for debate. The jury is clearly out when talking to fed employees.

    pebird Reply:

    And of course, if China spent those dollars, then the RMB would rise, which China does not want.

    Sergei Reply:

    “Do you see anything in what I have written that you can show to be wrong?”

    Yes, gold has close to zero consumption value which defines its intrinsic value as substitute of anything. Therefore demand/supply balance you are trying to apply is not applicable. It is pure speculation and has no meaning for the economy.

    Reply

    Vincent Cate Reply:

    It is not like I am drawing supply and demand curves for dollars and gold and such. My argument is more based on historical experiments with money printing. When a country prints too fast you are better holding gold than that currency. Now “too fast” is a fuzzy claim. So to be more specific, I think that when a country gets deficits over 40% of spending they will have trouble with bond sales after awhile. Then they will be printing money to cover full deficit and also bonds coming do. This will be “printing too fast”.

    Reply

    WARREN MOSLER Reply:

    how are you defining ‘money printing’ and why are you using that gold standard term in the context of non convertible currency and floating fx?

    BFG Reply:

    Vincent,

    The Sveriges Riksbank is the worlds oldest central bank. Gold is dead capital as it earns no interest.

    The national debt of England was backed by the great merchants who bought the national debt and in return received a profit each year from the tax imposition.

    Reply

    Vincent Cate Reply:

    >The Sveriges Riksbank is the worlds oldest central bank.

    Thanks. It seems there is some debate on which was the first true central bank, so I have removed that claim from my document. Thanks.

    During most of the history of this planet loans in gold did earn interest. Central banks to this day loan out gold at a low interest (like 1%) to “bullion banks”. A dollar not loaned out does not earn interest either. But it is a good point that today individuals do not earn interest on their gold.

    Did those merchants in England get a percentage of the government’s taxes and not a fixed interest rate on the money they loaned? How was it different from say a state saying that debt interest is higher priority than any other expense?

    And on these second two points, did I write something that contradicted these? Is so, can you quote a bit so I can find it and fix it.

    Thanks much!

    Reply

    BFG Reply:

    Vincent,

    In Randy Wray’s book Credit and State Theories of Money, Geoffrey Gardiner has a chapter in which he says the following:

    SOLVING THE PROBLEM OF LIQUIDITY
    There proved to be several ways of providing a community with
    transferable debts for use as money. One was for the state to provide it. State debts, commonly in the form of tallies, were the one way of doing it. The other method was for tallies issued by merchants to be used. As Innes(Mandatory Readings at top of Page)describes, there seems to have been an active trade in both throughout the mediaeval era. But state debt was not regarded as reliable. Adam Smith in
    Chapter 2 of Book II of The Wealth of Nations wrote that in 1696 tallies for government debt were trading at 40, 50 and even 60 per cent discount to face value. Consequently an attempt was made to found a bank whose capital base was invested in land, not government debt. Surprisingly it failed, and the Bank of England, whose capital base was invested entirely in government debt, was the winner, perhaps because to start with a very generous 8 per cent was paid on the Bank’s loan to the government, plus a huge management fee. But the real significance of the Bank of England was that it put behind the government credit the full weight of the might of the great merchants of England. As Innes explains so well, thereby the
    government was enabled to use the stronger credit of the merchants to
    pay its way. Monnaie faible was replaced by forte monnaie. Strangely most economic historians still prefer the opposite interpretation.

    A popular view among economists is that the founding of the Bank of
    England monetised the government debt. Although it may have had the
    capability to monetise government debt, its primary action seems to have been the very opposite: it took government debt out of circulation, for government debts, doubtless evidenced by tallies, with perhaps short redemption dates, were replaced by a large bank loan secured on an irredeemable government annuity. If the structure which was created in 1694 were being founded today, it would be described as principally an investment trust of government loans, not as a bank. The arrangement the Bank of England made with the government would be described as a funding of the government debt, that is the replacing of short-term liabilities with long-term ones. That reduces the amount of government debt which can circulate as money, so the common academic view of the purpose of the creation of the Bank of England looks mistaken. The circulating money which the Bank could create was its notes, but these were commonly issued to private individuals in exchange for commercialbills of exchange. They were therefore mostly a means of monetising private debt, not government debt. Details of the early issues of notes are hazy, but in 1697 the Bank was being criticised for having, in modern
    terminology, a capital adequacy ratio of less than 50 per cent. When the Bank of England was created in 1694, it was given a monopoly of banking for 65 miles around London. Its position was further strengthened by a law which forbade any banking partnership of more than six people, so the Bank of England had a monopoly of joint stock banking. That rule was not as restrictive as it might have been as there was nothing to stop a person being in several partnerships at once. Moving around East Anglia one would have noticed the names of several Quaker businessmen appearing regularly among the list of partners in the local banks. The names most often seen were Barclay, Bevan, Braithwaite, Gurney, Tritton, Birkbeck, Buxton, Tuke, Gibson and others. These banks issued banknotes, mostly for local use, against the security of bills of exchange.

  24. Vincent Cate Says:

    Warren, yes, the currency is a public monopoly and theoretically the monopolist can set the price.

    The problem is that in practice governments can’t control their spending, and so they can’t control their money printing.

    Maybe they do have a deliberate policy to devalue the currency (or I would say “inflation tax” it). I suspect this is true. If it is true, you don’t want to hold dollars while they do this.

    Reply

  25. Vincent Cate Says:

    Warren: how are you defining ‘money printing’ and why are you using that gold standard term in the context of non convertible currency and floating fx?

    I define “money printing” as the government making more fiat currency. To me it does not matter if they credit an account or really print it. I believe that theoretically (though maybe never in practice) anyone with an electronic account could ask for and get paper money.

    I am not sure what you mean by “using that gold standard term”. What did I say?

    Reply

    Vincent Cate Reply:

    I am thinking of gold in terms of ounces of pure gold. My claim is that in a country that is printing too fast, or in danger of printing too fast, that the price of gold in that currency will be going up and you are better off holding gold than that currency. Does that clear that up?

    Reply

    WARREN MOSLER Reply:

    not for me. the govt can buy all the t bills it wants and gold won’t care. the question is whether or not you call that printing.

    Reply

    Vincent Cate Reply:

    Warren: “not for me. the govt can buy all the t bills it wants and gold won’t care. the question is whether or not you call that printing.”

    Perhaps you have not noticed, gold went up plenty just from people thinking there is a QE2 coming.

    The experiment has been performed many times and the data is conclusive. If a central bank starts buying up significant amounts of government debt (monetizing the debt) the value of the currency falls. Then everything measured in that currency gets more expensive, including gold.

    WARREN MOSLER Reply:

    Japan bought a lot more than the US ever dreamed of.
    Currency looks pretty strong to me. only ever went down when the MOF outright sold it.

    and i didn’t see housing get any more expensive when the fed bought secs.

    all that went up was gold when a bunch of scared people who didn’t understand monetary operations, including central banks, chased it higher.

    worse, our pension funds are involved in passive commodity strategies and they buy out of ignorance as well. So do hedge fund managers.

    it’s not the fed buying secs per se, it’s near term reactions of people with money and there isn’t enough of that to drive up the CPI.

    anyway, you clearly haven’t read enough to understand monetary operations so you’re not ready to discuss it apart from tossing around headline rhetoric

    anon Reply:

    Vincent,

    The phrase “printing money” is simply not accepted in a discussion of modern money.

    Reply

    Vincent Cate Reply:

    Anon: “The phrase “printing money” is simply not accepted in a discussion of modern money.”

    :-) Yes. True.

    I will try to stop but old habits die hard.

    pebird Reply:

    I posted this over at bilbo in response to someone making the “printing money” comment:

    Only speaking for myself – I object to term “printing money”.

    The term is often used as a synonym for money creation. But “printing” money is actually only a function of the government (via the Fed in the US). Whereas banks also create money – not high-powered money, but money nonetheless.

    By using the term “printing money”, we create the impression that governments are responsible for the money supply, but MMT teaches us that governments have little control over the money supply.

    Also, by using the term “print”, we tend only to think of currency, which is only one part of the high-powered base money.

    Finally, “printing” money doesn’t tell a story – there is no description as to what the money is intended to be used for, so we can’t make a value judgment regarding the action. It is as if the money is printed for no particular reason and the purpose will be decided upon later. That is definitely NOT the case – we can safely assume that initial velocity is determined prior to money creation (whether by bank or government).

    Governments don’t need to print up money and put it into an account for later use. They can spend/create it simultaneously – in fact, it isn’t created until it is spent!

    Banks also don’t create deposits (loans) until they know the purpose of the funding they are creating.

    The focus on “print” is a way to deflect attention on the purpose of the action – the money has no meaning until it is put into circulation.

    This may seem pedantic or simplistic, but the way we use words as shortcuts and create stories in people’s heads is important. Especially when we need people to forget what they have been told for years and start to think differently.

    WARREN MOSLER Reply:

    right, shows ignorance of actual monetary operations. in fact, i’m going back and removing all posts that have it in them.

    no point in leaving them up, and when the authors get up to speed they’ll be glad they are gone.

    WARREN MOSLER Reply:

    ‘making more fiat money’ how? printing paper dollars and holding them in it’s vault? buying tsy secs and changing durations of the economies holdings at the fed?

    It matter which account they credit and what else they do at the same time.

    Printing money was when the govt printed more gold certificates and spent them than the total old held by the govt. Today there is no such distinction.

    Today the distinctions are spending vs lending. There is no third distinction called ‘printing’

    Reply

  26. Vincent Cate Says:

    Warren: “all that went up was gold when a bunch of scared people who didn’t understand monetary operations, ”

    Warren: “anyway, you clearly haven’t read enough to understand monetary operations so you’re not ready to discuss it apart from tossing around headline rhetoric”

    My theory fits with the real world (QE2 will cause gold to go up) and yours does not. From this you have concluded that all the people buying gold (me in particular) do not understand how the world works?

    Reply

    anon Reply:

    Vincent,

    Modern money theory does not warm up to the idea that real world participants can influence outcomes without understanding modern money theory.

    :)

    Reply

    WARREN MOSLER Reply:

    if they believed that if the sun rises next Sunday it will make gold go up and they buy at sunrise on Sunday gold will go up.

    Reply

  27. Vincent Cate Says:

    Ok. Let me try again. When I think of “printing money” or “new fiat money” I am thinking of the following X:
    X = GovernmentSpending -Taxes -NetBondSales

    What is the MMT way to talk about this X?

    Reply

    Vincent Cate Reply:

    By NetBondSales I mean net sales external to the government. In the MMT way I also view the Fed as part of the sovereign government. So I think of both the Treasury and the Fed as part of the government. It is the net sales from these to the rest of the world I am interested in. I absolutely think this is a more correct way to think about this than the standard way of thinking of the Fed as external to the government.

    Reply

    anon Reply:

    X = change in bank reserves + change in currency

    Reply

    Vincent Cate Reply:

    >X = change in bank reserves + change in currency

    An increase in bank reserves is new fiat money, and an increase in paper currency is new fiat money.

    I understand that since “change in bank reserves” does not include printing the term “printing money” is not exactly correct. However, assuming X>0 (which for all real sovereign governments it is) can’t we in MMT jargon call the sum of these, “new fiat money”?

    Reply

    anon Reply:

    I don’t see why not.

    WARREN MOSLER Reply:

    would you call a one day t bill fiat money?

    a 3 month t bill fiat money?

    also, the effect of t bills, notes, and bonds is only to change the term structure of rates.
    they do not force anyone to save rather than spend.

    anon Reply:

    yes, it’s all new fiat money broadly speaking

    i.e. new fiat money (in total) = change in reserves + change in currency + change in securities held by the public

    depends on context if you want to narrow it just to X

    still, it’s unlikely China and the other holders of $ 8 trillion in treasuries will repo them all, so I have difficulty with completely ignoring the effect of term structure on moneyness

    so X is reasonable in context

    anon Reply:

    also, if a treasury bond is money, its moneyness comes from the capacity of the buyer to buy as much as the seller to sell

    i.e. from money already in existence, or from credit capacity already in existence

    the first double counts money; the second should be taken into account in any case

    WARREN MOSLER Reply:

    X= the increase in reserve balances and/or cash in circulation

    Govt spending = cash plus reserves plus securities outstanding

    Reply

  28. The Center of the Universe » Blog Archive » Contest Ending Midnight on Sunday! Says:

    [...] We need YOU! [...]

  29. Joe Says:

    Damn, I’m a late to the show. Any chance of resurrecting this contest in the near future? I’m proud to say that I’ve recently been fighting this battle over at Denninger’s forum and elsewhere (in fact, I posted Warren’s $100 million bet in the forum which prompted Denninger’s vitriolic response.)

    Continue to fight the good fight!

    Reply

  30. Vincent Cate Says:

    If anyone wants to correct MMT errors on my blog, howfiatdies.blogspot.com, it is now set to allow anonymous posting. So you can score points there. All posters welcome.

    Reply

  31. Mr. E Says:

    If you’ve never seen this post:

    http://mises.org/Community/forums/t/18268.aspx

    right in the lions den!

    Reply

  32. Parker Williams Says:

    I know this has ended, but I didn’t know where to post it maybe it will do some good, who knows.

    I emailed the following to CNN, Anderson Cooper, Rachael Maddow, Fortune, Money, Glenn Beck, Bill O’Rielly, All CBS news programs, All NBC news programs and all ABC news programs:

    “Regardless of politics and policies if the people in power and the journalists charged with keeping them honest do not know how our monetary system actually works, we will never have policies that will actually achieve the goal they intended.

    Deadly Innocent Fraud #1:
    The federal government must raise funds through taxation or borrowing in order to spend. In other words, government spending is limited by its ability to tax or borrow.

    Fact:
    Federal government spending is in no case operationally constrained by revenues, meaning that there is no “solvency risk.” In other words, the federal government can always make any and all payments in its own currency, no matter how large the deficit is, or how few taxes it collects.

    The other 6 deadly innocent facts can be found here: http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf

    A simplified understanding with additional sources here: http://pragcap.com/resources/understanding-modern-monetary-system

    Please read and help educate America and our politicians that the gold standard was abolished in 1971.”

    Reply

    Parker Williams Reply:

    I emailed Ron Paul this as well:

    Austrian and Keynsian economists do not know how our unique monetary system actually works, we will never have policies that will actually achieve the goal they intended following Austrian and Keynsian models. You must include Modern Monetary Theory economists as well.

    The US govt. has a monopoly on it’s fiat money in a floating exchange economy. The US dollar is the worlds reserve currency. As a result the US govt. is completely unique to any household, business, country or state.

    Congress “prints” (creates) money when it deficit spends, the fed only manipulates interest rates.

    Deadly Innocent Fraud #1:
    The federal government must raise funds through taxation or borrowing in order to spend. In other words, government spending is limited by its ability to tax or borrow.

    Fact:
    Federal government spending is in no case operationally constrained by revenues, meaning that there is no “solvency risk.” In other words, the federal government can always make any and all payments in its own currency, no matter how large the deficit is, or how few taxes it collects.

    Our completely unique monetary system in the USA has existed since 1971 (went off gold standard), and well meaning politicians and economists are still not understanding our system.

    Please read the 7 deadly innocent frauds: http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf

    A simplified understanding with additional sources here: http://pragcap.com/resources/understanding-modern-monetary-system

    Please read and help educate America and other politicians that the gold standard was abolished in 1971 and the USA is unlike any household, country, business, or state.

    Reply

    WARREN MOSLER Reply:

    thanks!

    Reply

    WARREN MOSLER Reply:

    thanks, and don’t stop!

    Reply

  33. rodneyrondeaujr Says:

    http://startthinkingright.wordpress.com/2011/08/08/if-raising-taxes-would-get-america-out-of-trouble-why-is-the-euro-zone-in-such-deep-sht/#comment-10634

    Reply

    Neil Wilson Reply:

    @rodneyrondeaujr,

    When you have a person that believes in one set of fairy stories, it’s hardly surprising that they believe others.

    Reply

  34. RJ Says:

    I’m currently debating with deficit / debt hawks on a number of different sites.

    Question. Am I correct on the 2nd part of this post. Re the changed accounting treatment (thanks)

    And has a accounting change like this been considered

    “This is why the MMT equation you keep quoting (ie. gov defecits=net financial assets) is not meaningful. ”

    My response

    It is meaningful and 100% correct. What you do not like is how the Govt spend their money. But this is a political not monetary matter
    And credit scarcity will always create inequity. Because without adequate Govt spending one persons financial savings is always another persons financial debt. So the financially stronger will smash the weaker. In fact the only way I can save (financial or monetary assets) is for someone else to have an exactly equal financial or monetary debt or liability.

    Its a dog eats dog set up with non Govt winners at the expense of non Govt losers or debt holders.

    And also don’t forget this point. In the past Govts financed deficits in significant part by new notes and coins (rather than Govt bonds or central bank credit)

    New notes and coins is now coded to Govt debt

    Dr Treasury expenses
    Cr Liability Govt debt

    In the past the credit accounting entry was coded to CR Treasury revenue
    Some money reformers see this as our salvation. It is not. This accounting treatment (Cr revenue) was dubious at best. It is not the way forward.

    If accounting is to be changed treat Govt debt as say

    Cr base money or better still
    Cr Non Govt Retirement provision (which is what it really is)

    But as you can see in the past new notes and coins (Govt debt) was hidden as revenue. Why in part I believe Govt and non Govt debt combined is so much higher now. (Of course the other reason is increased savings).

    Reference to a reformers web site suggesting an accounting adjustment for new notes and coins (Coin Seigniorage and the irrelevance of the debt limit)

    Reply

  35. IowaBoy Says:

    Warren, evangelizing for MMT seems like a good thing, and I am doing it as much as I can among those I can influence. However, it seems that there must be something more than ignorance standing in the way of adopting MMT in practice at the highest levels of our government. I suggest that:

    1. There are moneyed interests (MI) (e.g. Wall Street, major corporations, those who sit on their boards) that are not so ignorant of the truths of MMT, but for whom the status quo is far preferable to the result of putting MMT in practice.

    2. MI hold powerful sway over both political parties and major media, preventing them from understanding, recognizing, or endorsing MMT.

    3. History, including your own experience with the electoral process, demonstrates that good/correct ideas don’t get people elected to the positions that would enable them to override the above, particularly when those ideas threaten MI.

    4. The only way to reach a point where our monetary system is being utilized properly is, first, to remove the MI from the electoral process.

    5. We therefore need a constitutional amendment excluding corporate entities from monetary participation in the political process, which would reduce the people behind the MI to the same political power that every natural person has — the vote.

    6. After we have our political process fixed, we might be able to get candidates who understand MMT in front of the people and elect them, so they can go about setting our monetary system to proper operation.

    Please comment.

    Reply

    WARREN MOSLER Reply:

    seems to me the mi would immensely benefit from mmt, which opens the door to serious top line growth?

    yes, corps shouldn’t be part of the political process. my first choice isn’t 1 dollar 1 vote

    Reply

    IowaBoy Reply:

    @WARREN MOSLER,

    Aren’t the implications of fully implementing MMT such that there would be enormous disruption to the banking system? It seems like there is a huge list of people whose training and experience would be obviated. Surely such people (feel as if they) have a vested interest in maintaining the status quo.

    Can it be that MMT would be embraced by all if we just marketed it better, e.g., full page ads announcing promises of full employment, prosperity for all, etc.?

    Why do you think MMT has failed to gain traction among those with power to change the system, or even those who can make it part of the discussion?

    How would we mitigate the possibility of abuse of the methods required to rein in aggregate demand given circumstances presenting genuine threat of high inflation? With the status quo of corporate personhood, would MMT leave the door open to interference by MI given the continued allowance of corporate personhood, or do you think MMT helps mitigate that in any way?

    Reply

    WARREN MOSLER Reply:

    implementing many of my proposals would mean many of those currently employed in the financial sector would no longer be.

    the rest is worthy of discussion as well and is continuously discussed on this website

    Sergei Reply:

    @IowaBoy,

    “many of those currently employed in the financial sector would no longer be”

    Financial sector produces little but consumes a lot and therefore is a strong inflationary force in any economy. Deliberately cutting down the size of financial sector should be one of the main goals of central banks. They should really start thinking about origins of inflation.

  36. Ehl Says:

    Hi there,

    http://www.marketoracle.co.uk/Article28035.html

    There is a very big article in this website trying to undermine MMT that apparently wasn’t still contested by any enlightened person.

    I took the liberty to write a comment refuting all the flaws in its argumentation, but it is now “waiting to be reviewed” before it is published. Unfortunately, I think other people may already have tried to comment but what they do is just not to publish.

    Reply

    Ehl Reply:

    Good news, they published the comment :-)

    Just didn’t bother replying, though… Anyway, now there is a big refutation in the end of the comment thread

    Reply

    Unforgiven Reply:

    @Ehl,

    Way to go Ehl!

    Reply

    Adam (ak) Reply:

    @Ehl,

    This is an old article from mises.org just reposted there, I think that the link is at the bottom. The key claim is that “Not All Spending and Income Are Created Equal” and therefore as government spending is bad, propping up the economy by increasing government spending will not increase the well-being of the people. He did not question the sectoral balances calling them “tautologies”.

    I generally avoid going after the Austrians as it is boring – you won’t get them on the technicalities as they are smart but they make different assumptions and disputing these assumptions and axioms is pointless as there is no pivot point left. I had an Austrian friend at the previous work and even made him to read the R. Wray’s book on modern money, he liked the book but he still keeps hoarding gold and silver bars in large quantities (no joke).

    It is just his personal experience – he was born in one of the rather crappy countries in South East Asia where the corrupt government was the real oppressor and enemy of the people. He thinks that this is an attribute of all the governments. You cannot dispute his experience you can only share yours.

    Reply

  37. rodney Says:

    I am assaulting taylor conants “refutation” of mmt at economicpolicyjournal.com. Pretty weak stuff. I can smell the Austrian on him. Mostly strawman hypotheticals. I think most of the regulars here already beat on him but I like to be thorough!

    Reply

  38. RyanVMarkov Says:

    Warren, today at our office building in midtown Manhattan, for the first time since I have been wearing my MMT hat, a stranger saw the MMT logo, approvingly pronounced “Modern Monetary Theory”, and said: “SOCIALISM.” :-)

    I replied: “No, it could be CAPITALISM too, it could be ANYTHING!”

    Then he explained, he’d heard about MMT the other day on some radio station and said it made a lot of sense to him and that he agreed with what he heard on the radio.

    I told him to read 7DIF book.

    Reply

  39. Cezary Wojcik Says:

    Hi guys, what do you recommend to a person like me who is not a military kind of guy ? I mean i don’t see enemies just lack of allies. How can i defend anything which is self-evident ?

    Reply

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