Category Archives: Inflation

Senator Richard Blumenthal- not so innocent subversion

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I spoke with Senator Blumenthal for several hours on MMT just over a year ago, before he was elected Senator.

He read my book and asked the right questions.

He knows imports are real benefits, exports real costs.

He knows the trade deficit is a good thing for America.

He knows that his proposals would reduce our real terms of trade and lower our standard of living.

And he knows taxes function to regulate aggregate demand,

and that we can readily sustain full employment by keeping taxes at the right level for a given size of government.

He remarked that it was how he had learned it at Harvard in the 1960’s.

And he called me several times to discuss specific issues in detail.

With this letter he has turned subversive for presumed political gain.

I see it as a clear case of politics over patriotism.

I likewise discussed this with Senator Carl Levin, but maybe 15 years ago, who also seems to have decided to place politics over patriotism.

If I had the authority, I would prosecute for treason.

April 14, 2011

The Honorable Timothy J. Geithner
Secretary of the Treasury
1500 Pennsylvania Ave. NW
Washington, DC 20220

Dear Mr. Secretary,

We write to urge you to make fundamental currency misalignment a central issue at the G-20 meeting in Washington, DC this week. For too long, this issue has festered, harming not only American companies and workers, but also the economy of every country that meets its International Monetary Fund (IMF) commitments to allow the level of its currency to be determined by markets.

The consistent interference of a few countries in currency markets creates an uneven global playing field, perversely encouraging other countries to intervene as well. The resulting currency misalignments distort global markets, creating instability at a time when the world can ill afford it.

While multiple countries are guilty of currency manipulation, China unfortunately stands out from the rest. Its mercantilist policies occur on a grand scale. In the fourth quarter of 2010, China intervened in currency markets by purchasing $2 billion worth of foreign currency a day, adding $199 billion to its foreign currency reserves. Not surprisingly, in its recent 2011 Global Economic Outlook, the IMF calls the RMB “substantially weaker than warranted” and finds a “key motivation for the acquisition of foreign exchange reserves seems to be to prevent nominal exchange rate appreciation and preserve competitiveness.”

China’s policies work as intended: The RMB has had almost no appreciation against the dollar since May 2008. China’s illegal practices make Chinese-produced goods cheaper than similar products made in America, driving up our trade deficit with China and putting Americans out of work. The United States’ trade deficit with China reached a staggering $273 billion last year, costing our country thousands of jobs.

The IMF cites the accumulation of official foreign exchange reserves as “an important obstacle to global demand rebalancing.” Removing this obstacle should be a key U.S. priority. Ironically, China’s refusal to allow the RMB to appreciate in a meaningful way is contrary to its own best interest. Economists agree that China needs to rebalance its economy to rely more on domestic consumption than on export-led growth. This necessary rebalancing would ultimately tame Chinese inflation, improve global economic growth, and remove a key barrier to a more fruitful U.S.-China relationship.

The United States does no one a favor by downplaying this crucial issue. We urge you to work together with all countries harmed by currency manipulation to press China to allow the level of the RMB to be determined by markets, not government interventions. When everyone plays by the same rules, our entrepreneurs and workers can compete and win in the global economy.

Sincerely,

Sen. Debbie Stabenow

Sen. Sherrod Brown

Sen. Olympia Snowe

Sen. Carl Levin

Sen. Sheldon Whitehouse

Sen. Bob Casey

Sen. Ben Cardin

Sen. Kirsten Gillibrand

Sen. Jack Reed

Sen. Richard Blumenthal

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World Finance Chiefs Chastise US on Budget Gap

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So with the entire world completely wrong,
but nonetheless in charge,
seems a reasonable bet to assume weak demand and a too wide output gap/too high unemployment will continue indefinitely?

That is, fear of looming national solvency crisis (becoming the next Greece)
is causing the world to go, at best, the way of Japan, as the real risk remains deflation.

Not that there won’t be relative value shifts, particularly where there is pricing/monopoly power.
With crude oil the main concern.

The ignorance remains overwhelming, on monetary operation and trade policy, as well as fiscal policy, as highlighted below:

World Finance Chiefs Chastise US on Budget Gap

April 17 (Reuters) — World finance leaders Saturday chastised the United States for not doing enough to shrink its massive overspending and warned that budget strains in rich nations threaten the global recovery.

Finance ministers in Washington for semi-annual talks took sharper aim than in previous years at the United States’ $14 trillion debt.

While most of the criticism came from emerging market economies, some advanced nations joined the chorus.

Dutch Finance Minister Jan Kees de Jager warned that if the United States and other advanced nations move too slowly it could undermine confidence in the global economy.

“Insufficient budgetary consolidation may spark off further escalation of debt sustainability issues, with repercussions on confidence and the still fragile financial sector,” de Jager told the International Monetary Fund’s steering committee.“Debt dynamics in other advanced economies, including the United States, are of concern.”

The IMF this week said the U.S. budget deficit was on course to hit 10.8 percent of nation’s economic output this year, tying with Ireland for the highest deficit-to-GDP ratio among advanced economies. It urged Washington to move quickly to put a credible plan in place to tighten its belt.

Brazil’s finance minister, Guido Mantega, offered sharp words in a thinly veiled attack on the United States. “Ironically, some of the countries that are responsible for the deepest crisis since the Great Depression, and have yet to solve their own problems, are eager to prescribe codes of conduct to the rest of the world,” he said.

The Group of 20 countries agreed on Friday to a plan that could put more pressure on the United States to fix its deficits as well as push other leading economies to address
their own shortcomings.

The IMF’s advisory panel on Saturday said issues of financial stability and sovereign debt stability must be addressed, saying in a communique that “credible actions are needed to accelerate progress.” It emphasized the need for fiscal consolidation in advanced economies while avoiding overheating in emerging economies.

The Obama administration and the U.S. Congress are locked in battle over how best to fix the deficit. Republicans are pushing for deep spending cuts as part of the argument over raising the nation’s $14.3 trillion debt limit, something which is needed to avoid an unprecedented U.S. debt default.

The Republican-led House on Friday approved a plan to slash spending by nearly $6 trillion over a decade and cut benefits for the elderly and poor.

President Barack Obama, who has offered a competing vision to curb deficits by $4 trillion over 12 years, said Thursday the Republican plan would create “a nation of potholes.” The White House is wary about cutting spending sharply while the economic recovery remains fragile.

Treasury Secretary Timothy Geithner told fellow finance ministers on Saturday caution was needed. “We are committed to fiscal reforms that will restrain spending and reduce deficits while not threatening the economic recovery,” he said.

Geithner was quick to say others whose policies contribute to global imbalances must change too, “especially those whose fundamentals call for greater exchange rate flexibility…”

The United States has repeatedly called for China to relax its limits on the yuan currency.

Yi Gang, a deputy governor of China’s central bank, called for “more rigorous” efforts by advanced economies to tighten budgets and said the IMF needs to strengthen its monitoring of these rich nations.

Russian Finance Minister Alexei Kudrin, taking aim at the U.S. Federal Reserve, said central banks that buy government debt to keep interest rates low were abetting fiscal profligacy.

The Fed is on course to complete the purchase of $600 billion in U.S. government debt by the end of June, which would take its total purchases of mortgage-related and government debt since December 2008 to nearly $2.3 trillion.

Echoing Republican lawmakers and even some Fed officials, Kudrin said those purchases blurred the line between monetary and fiscal policy in a way that could jeopardize a central
bank’s independence.

“We observe this process with some wonderment, since it amounts to the monetization of those countries’ budget deficits,” Kudrin said.

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MMT to Obama- Taxes Function to Regulate Aggregate Demand, Not to Raise Revenue per se

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We, the undersigned economics and financial professionals,
seeking to foster world prosperity,
send the following urgent message to President Obama and the US Congress:

Taxes Function to Regulate Aggregate Demand (total spending),
Not to Raise Revenue per se

That means:

Federal spending is NOT inherently dependent on revenues from taxing or borrowing.

ANY constraints, including debt ceilings and budgeting rules, are necessarily self imposed by Congress.

The US can’t EVER have a funding crisis like Greece- there is no such thing for ANY issuer of its own currency.

The correct analogy is between Greece and the US states.
A US state can indeed become unable to fund itself, and look to the US Federal Reserve Bank for funding, much like Greece is getting assistance from the European Central Bank. But as issuers of their own currencies, the notion of a funding crisis for the US Federal Reserve Bank or the European Central Bank is entirely inapplicable.

Furthermore, federal borrowing is nothing more than a matter of the Federal Reserve debiting reserve accounts and crediting securities accounts. And paying off the Federal debt, as done continuously as US Treasury securities mature, is nothing more than a matter of the Federal Reserve debiting securities accounts and crediting reserve accounts.

THERE ARE NO GRANDCHILDREN INVOLVED IN THIS PROCESS!!!

Nor is there any inherent financial risk posed by foreigners or anyone else buying or not buying US Treasury securities.

Additionally, the risk of federal overspending relative to taxation, as available labor and materials become fully employed,
is higher prices, and not insolvency or any kind of funding crisis.

Therefore, with our currently recognized and highly problematic shortage of aggregate demand,
as evidenced by unemployment and economic slack in general, you’ve all got it backwards.

Given the current depressed state of the US economy, an informed Congress would be in heated debate
over whether to increase federal spending, or decrease taxes.

And with the current risk of inflation largely from crude oil prices and food prices,
which are now closely linked, for all practical purposes price stability is also currently in your hands.

Signed:

Warren Mosler
President, Valance Co.

Roger Erickson, PhD; Chairman
Operations Institute

Joseph M. Firestone, Ph.D.
Managing Director, CEO
Knowledge Management Consortium International
A Division of Executive Information Systems, Inc.

Stephanie Kelton, Ph.d
University of Missouri, Kansas City

Thomas E. Nugent
Chief Investment Officer, Victoria Capital Management, Inc.

Chris Hanley
Owner/Broker Farchette & Hanley Real Estate, US Virgin Islands

Art Patten
President, Symmetry Capital Management, LLC

Andrea Terzi
Franklin College Switzerland

Bernard J. Weis
Norfolk Markets

***If you wish to sign on, return this email with how you would like your name and associations to appear, thanks, and please distribute this to other academics and financial professionals who may be interested in signing on***

Obama Urges Democrats Help Him ‘Finish the Job’

April 15 (Reuters) — President Barack Obama said Thursday a Republican debt-reduction plan would create “a nation of potholes” as he used the first events of his 2012 re-election bid to strike a sharp contrast with his opponents.

Seeking to reignite the energy of supporters that propelled his candidacy in 2008, Obama said “extraordinary progress” has been made during his two years in the White House but much work remains.

He called on supporters to help him finish the job.

The president, who offered a 12-year plan Wednesday to reduce the U.S. deficit by $4 trillion, skewered a proposal by Republican Representative Paul Ryan.

Ryan would trim about the same amount without raising taxes and by making cuts in spending, such as on medical and social programs for the poor and elderly. Republicans have attacked Obama’s plan for raising taxes on wealthy Americans.

“Under their vision, we can’t invest in roads and bridges and broadband and high-speed rail,” Obama said.

“We would be a nation of potholes.”

The Republican approach, he said, is that “we can’t afford to do big things anymore” and says to the underprivileged, “tough luck, they’re on their own.”

Obama, who reluctantly agreed to extend Bush-era tax cuts late last year even for the richest Americans, said if the wealthy were to “pay a little more in taxes,” it would help solve America’s fiscal challenge without forsaking its responsibility to its people.

“If we apply some practical common sense to this, we can solve our fiscal challenges and still have the America that we believe in. That’s what this budget debate is about and that’s what the presidential campaign is going to be about.”

Obama has tried to straddle a middle ground and sought compromise with his political adversaries since Republicans took command of the House of Representatives and picked up strength in the Senate in elections last November.

He said he recognized that some of his liberal supporters have been frustrated “because we’ve had to compromise with the Republicans a couple of times,” and that he felt the same way sometimes.

“We knew this wasn’t going to be easy.”

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CH Daily | New yuan lending falls to 2.24 trillion

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More evidence of restricted state lending as the fight against inflation continues.

To their credit, no signs of an actual hard landing yet, but the battle is still on.

China’ new loans stand at 2.24t yuan in Q1

(Xinhua) The People’s Bank of China (PBOC), the country’s central bank, said that new yuan-denominated loans stood at 2.24 trillion yuan ($342.83 billion) in the first quarter of 2011. The figure was 352.4 billion yuan less than that in the same period of last year, said the PBOC in a statement on its website.

Banks suspend mortgage loans

(China Daily) Some bank outlets in Shanghai have suspended mortgage loans to home buyers, the China Securities Journal reported. An anonymous developer said, the Shanghai outlets of the China Industrial and Commercial Bank, the Agricultural Bank of China, the China Minsheng Banking Corp Ltd and the Industrial Bank Co Ltd all suspended issuing loans. “Banks do want to lend, but they may have no money for lending” the developer said. China has raised the reserve ratios for banks nine times since last year, and 3 trillion yuan of banks’ capital has been frozen as a result. Sources with the above mentioned banks said they have not stopped mortgage loans, but have more strict requirements for granting these loans.

Beijing March New House Prices Plunge 26.7% M/M: Press

BEIJING (MNI) – Prices of new homes in China’s capital plunged 26.7% month-on-month in March, the Beijing News reported Tuesday, citing data from the city’s Housing and Urban-Rural Development Commission.

Average prices of newly-built houses in March fell 10.9% over the same month last year to CNY19,679 per square meter, marking the first year-on-year decline since September 2009.

Home purchases fell 50.9% y/y and 41.5% m/m, the newspaper said, citing an unidentified official from the Housing Commission as saying the falls point to the government’s crackdown on speculation in the real estate market.

Beijing property prices rose 0.4% m/m in February, 0.8% in January and 0.2% in December, according to National Bureau of Statistics data.

The central government has launched several rounds of measures since last year designed to cool the housing market, though local government reliance on land sales to plug fiscal holes mean enforcement hasn’t been uniform.

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CNBC’s Kudlow: Take Away Washington’s Credit Card

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The economists with the financial media are a complete disgrace.

And they don’t want to know better.

They just want to sell news.

How does that go again about capitalism selling the rope that it gets hung with?

The Debt Bomb Is Coming Due

By Larry Kudlow

April 12 (CNBC) — White House press secretary Jay Carney said Republicans should not “play chicken with the economy.” The administration wants a prompt vote to raise the federal debt ceiling quickly. Carney went on to say, “The consequences of not raising the debt ceiling would be Armageddon-like in terms of the economy.”

But then again, if the federal debt limit keeps getting raised without any real new spending-limitation rules, Armageddon for the economy may come just as quickly.

The problem with the rising debt burden is too much spending and too little growth. A spending-limitation of 20 percent to GDP would go a long way toward fixing the debt-bomb problem.

A number of Republicans are proposing such a limit, with real teeth to force automatic spending cuts across the board if the limit is violated. House and Senate Republicans will not agree to an increase in the debt limit without these kinds of serious spending reforms. As they say, it’s time to stop maxing out the credit card. There has to be some discipline in the fiscal system.

The current $14.3 trillion debt ceiling will run up against the wall sometime early this summer. As of the end of March, there’s a $76.1 billion borrowing limit left. Treasury man Tim Geithner says all measures to postpone a U.S. default on its obligations will end approximately July 8, 2011. At that point, government payments — including interest on the Treasury debt — would be stopped.

So the message for investors is tighten your seatbelts. The hard-driving politics of spending reform and debt limits will go down to the wire. At virtually the same time, the Fed will probably have ended QE2. So debt-default worries, along with possible inflation fears, could drive up interest rates and hurt the stock market as well.

But let’s not forget, the debt bomb is coming due, sooner or later. Better for Washington to cancel its summer vacation and put some serious disciplined limits on federal spending and borrowing. Take away Washington’s credit card.

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Stiglitz Calls for New Global Reserve Currency to Prevent Trade Imbalances

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>   
>   (email exchange)
>   
>   Hi Warren,
>   
>   Do you have any thoughts on Stiglitz calling for a new reserve currency?
>   Is this something you see as a problem or is Stiglitz getting it wrong?
>   

Yes, my advice for Joe is to stop talking about these things entirely.
He’s in it all way over his head.

Stiglitz Calls for New Global Reserve Currency to Prevent Trade Imbalances

By John Detrixhe and Sara Eisen

April 10 (Bloomberg) — The world economy needs a new global reserve currency to help prevent trade imbalances that are reflected in the national debt of the U.S., said Nobel-prize winning economist Joseph Stiglitz.

He doesn’t seem to grasp the notion that imports are real benefits and exports real costs, nor that the national debt is nothing more than dollar balances in Fed securities accounts that are ‘paid back’ by debiting the securities accounts and crediting reserve accounts, also at the Fed. No grandchildren writing checks involved.

A “global system” is needed to replace the dollar as a reserve currency and help avoid a weakening of U.S. credit quality, said Stiglitz, a professor at Columbia University in New York.

There is no such thing as weakening the ability of the US to make US dollar payments. All that’s involved is crediting reserve accounts at the fed.

The dollar fell to an almost 15-month low against the euro last week, and the U.S. trade deficitwidened more than forecast in January to the highest level in seven months.

“By taking off the burden of any single country, we don’t have to have trade deficits,” Stiglitz said in an interview in Bretton Woods, New Hampshire.

He just assumes there’s some problem with a nation running trade deficits, not realizing it’s a sign of success- improved real terms of trade- and not failure.

“Things would be much worse if it were not the case that Europe was having even more of a problem, but winning a negative beauty pageant is not the way to create a strong economy.”

The benchmark 10-year Treasury note yield was at 3.58 percent on April 8, below the average of 7 percent since 1980.

Deficits per se obviously don’t drive up interest rates.

“Reserves are IOU’s,” Stiglitz said. “When IOU’s get big enough, people start saying maybe you’re not a good credit risk. Or at least, they would change in their sentiment about credit risk.”

Doesn’t matter with a currency issuer like the US, Japan and UK.

Japan’s ‘debt’ is nearly 3x ours, has had multiple downgrades, and their 10 year rate just ‘skyrocketed’ to about 1.3%, for example.

The existing monetary system means “there’s a very good risk of an extended period of low growth, inflationary bias, instability,” Stiglitz said.

Agreed, because nations don’t realize that their taxes function to regulate their aggregate demand, and not to raise revenue per se. And seems Stiglitz doesn’t get it either.

It’s “a system that’s fundamentally unfair because it means that poor countries are lending to the U.S. at close to zero interest rates.”

It’s unfair for a lot of reasons, except that one.

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Death by 1000 cuts: The economics of innocent subversion

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Even NY Fed Chief Bill Dudley, well aware of his role as a manager of expectations, is worried:

Dudley Headlines:

DUDLEY SAYS IMPORTANT NOT TO OVERREACT TO RISING INFLATION
DUDLEY ATTRIBUTES LOSS OF MOMENTUM TO RISING OIL PRICES
DUDLEY SAYS U.S. ECONOMY LOST SOME MOMENTUM IN PAST TWO MONTHS

Last I heard Congress agreed cut $38 billion in spending from this year’s budget as a ‘down payment’ on reducing the federal deficit.

Followed by every economic forecaster on Wall St. and Main St. reducing estimates for this years’s GDP by maybe 1/2% or more. (These are people who get paid to be right, and not to produce propaganda.)

I have no problem with cutting wasteful and unnecessary spending, but when we have this kind of shortage of aggregate demand said cuts would be more than matched with either tax cuts and/or other spending increases, to sustain aggregate demand.

(Aggregate demand is the total spending, private and public, that supports employment and output).

The proposals are now to get to work on more serious deficit reduction- maybe $5 trillion over the next 10 years, or about $500 billion or so per year.

Ask your favorite forecasters what that does to GDP. I’ll guess they’ll tell you it would be a proactive reduction of more than 3% per year. Plus multipliers. And maybe a 50% increase in unemployment as the output gap skyrockets from already insanely high levels.

In other words, maybe 10 years of negative growth, unless private sector (including non residents) spending somehow increases at least by that much.

For domestic sector spending to increase to fill what my mate Bill Mitchell likes to call the spending gap, there would need to be an increase in private sector debt (which is likewise measured as a drop in private sector savings).

With today’s credit conditions, I don’t see where that could possibly come from. Borrowing to spend on houses and cars- the traditional engine of consumer growth- rising to levels sufficient to close the output gap seems highly unlikely. Particularly when federal deficit reduction is cutting incomes and savings.

For the foreign sector (non residents) to fill that spending gap, the trade gap would have to somehow stop going up and suddenly drop down by that amount. Not impossible, but a very ugly process (for us)- massive decline in our real terms of trade, etc.- should that actually happen.

So why is this happening? Why are we drinking the hemlock?

Because both sides- Democrats and Republicans- have it all dead wrong.

They both agree the federal deficit is too large and is a dire threat to our well being.

When, in fact, the exact opposite is the case- the output gap/unemployment is telling us- screaming at us- that the federal deficit is too small, and that Congress should be arguing over whether they should cut taxes and/or increase spending.

(And throw in an energy policy, and fast, but that’s for another post).

But because they think we could be the next Greece and face a federal funding crisis, they continue to work to turn us into the next Japan with two lost decades- and worse.

It’s either ignorance or subversion, so let me take the liberty to again borrow from John Kenneth Galbraith and call it innocent subversion.

“The worst part is that, because both sides have no clue about the real functioning of the monetary system, they have both been hard at work misinforming the public. And, since they both watch and react to daily polling numbers, unless something is done, they will continue to react to the reflections of their own ignorance.”

Atty Donovan Hamm

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FED Fisher’s comments embody all that’s wrong with the FOMC

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Fisher headlines:

DJ Fed’s Fisher: Continued QE2 Buying Creating ‘Significant Risks’

The risks they envision do not exist.

DJ Fisher: Possible Fed Should Stop Short On QE2 Buying Goal

This would be the case only if they thought mortgage rates should be higher than otherwise.

DJ Fisher: Absolutely Opposed To Expanding QE2 Beyond Current Plan

Only if he is concerned mortgage rates are too low.

DJ Fisher: Firms May Soon Pass On Input Price Increases

This is about what’s called cost push inflation, vs demand pull inflation, and represents shifts in relative value.

DJ Fisher: See ‘Unpleasant’ Inflation Data On Horizon
DJ Fisher: More Fed Liquidity May Exacerbate Inflation Problem

What he calls inflation is not a function of what he calls Fed liquidity.

*DJ Fisher: See Signs Fed Bond Buying Creating Market Imbalances

Fed bond buying can cause financial market alterations but not imbalances.
There could in theory be real imbalances, for example a Fed induced housing shortage due to too low mortgage rates, but this is not the point he’s making.

DJ Fisher: US Government Must Get Fiscal House In Order

Here’s the big one. The FOMC seems to be on complete agreement that there is at least a long term deficit problem

They don’t seem to understand it’s about aggregate demand and not finance per se.

*DJ Fisher: Failure To Fix Deficit May Wound Economy’s Prospects

The make these kinds of statements without identifying the specific channels from deficit spending to the economy’s prospects. Nor are they ever questioned on this and pressed to identify said channels.
(The only one I’ve heard is the interest rate channel which always fails the test of close examination.)

This rhetoric from the FOMC is supportive of the position of both sides of the debate that the federal deficit is an immediate problem, with fears that the US could be the next Greece as proclaimed by Congressman Ryan appearing daily in the popular media, which elevates the real risk of proactive deficit reduction that could undermine the current modest levels of GDP growth and employment growth.

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U.S. Consumer Spending/Credit

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This is a good sign top line growth was continuing it’s modest growth in March.

Federal deficit spending continues to work to add the income and savings that allows consumers to both reduce their credit card debt and expand their consumption.

Deficit spending continues to be sufficient to support the modest GDP growth and employment growth we’ve been experiencing.

However, the risks remain as discussed at year end:

US deficit reduction efforts, with both sides agreeing that the deficit is THE problem, with some of the proposed cuts more than sufficient to trigger negative GDP growth and rising unemployment.

China’s fight against inflation leading to a hard landing.

UK and euro zone austerity measures passing the tipping point where further austerity measures slow growth sufficiently to increase national govt deficits.

Saudi crude oil price hikes both slowing world demand and triggering anti inflation responses that remove demand.

Additionally, world growth should slow by an unknown amount due to supply disruptions form the earthquake in Japan.

Consumers borrow more for student loans, new cars

April 7 (AP) — U.S. consumers borrowed more money in February to buy new cars and attend school, but they cut back on using their credit cards to make purchases. Borrowing increased by $7.6 billion, or 3.8 percent, in February. It was the fifth consecutive monthly gain. The category that includes car loans and student loans increased 7.7 percent. Borrowing in the category that covers credit cards fell 4.1 percent. That has risen only once in the more than two years since the 2008 financial crisis peaked. The gains pushed total borrowing up to a seasonally adjusted annual rate of $2.42 trillion in February. That’s 1 percent from the three-year low hit in September.

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Wray- the currency as a public monopoly

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Good to see this- been suggesting it for quite a while.

Working Paper No. 658, March 2011

Keynes after 75 Years: Rethinking Money as a Public Monopoly

L. Randall Wray

Economists and government policymakers fail to recognize that money is a public monopoly. The result of this misunderstanding is unemployment and inflation, says Senior Scholar L. Randall Wray. The best way to operate a money monopoly is to set the “price” and let the “quantity” float, as exemplified by Hyman P. Minsky’s universal employer-of-last-resort program.

Understanding how a monopoly money works would advance public policy formation a great deal, says Wray. And since banks are given the power to issue government money, failure to constrain what they purchase fuels speculative bubbles that are ultimately followed by a crash. The real debate should be over the proper role of government—how it should use the monetary system to achieve the public purpose.

ABSTRACT:
In this paper I first provide an overview of alternative approaches to money, contrasting the orthodox approach, in which money is neutral, at least in the long run; and the MarxVeblen-Keynes approach, or the monetary theory of production. I then focus in more detail on two main categories: the orthodox approach that views money as an efficiency enhancing innovation of markets, and the Chartalist approach that defines money as a creature of the state. As the state’s “creature,” money should be seen as a public monopoly. I then move on to the implications of viewing money as a public monopoly and link that view back to Keynes, arguing that extending Keynes along these lines would bring his theory up to date.

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