Modern (& Ancient) Monetary Foolishness

Let’s start fresh on this one….(or, what I did instead of working or going to church this morning)  And, with apologies to Mr. White, but a good debate pulls no punches.

Our Mr. White, in the last post, has proposed a sort of blanket debt forgiveness that, for those with a Judeo-Christian background, would be understood as a “Jubilee”, about which more can be read here.  Of course (IMHO), this biblical practice was patterned after (and, thus, intended to reinforce) God’s plan of salvation.  The concept of remission of sin was extended to include – or, rather, be demonstrated in – the legal concepts of property ownership using debt as an analog for sin…you might say that was the central premise. 

Leaving aside a more detailed review of the subject – which is, admittedly, probably well above my pay grade, I would submit that the practice:  a) did not implicitly proscribe debt, but, rather b) discouraged it and presented both practical and moral limitations on the practice.  If nothing else, it more explicitly served as a reminder against the risks of a permanent state of indebtedness.  Bad enough when it came to property and finances, worse still with indentured servitude, and utterly catastrophic in regards to the soul.   Of this we can be certain:  its purpose was not to encourage indebtedness with the promise of a last-minute pardon.

But, before leaving the biblical realm we might also be reminded that:

What has been will be again, what has been done will be done again; there is nothing new under the sun.  ~ Ecclesiastes 1:9

And, so it is with debt and money.  We’ve had reason in the past, for instance, to call attention to the Greeks own ancient innovations with debasing currency to solve a sovereign debt problem.  Nothing, nothing at all, new under the sun in today’s headlines.  Nor is there, I fear, in Mr. White’s MMT prescription for the current economic crisis.  It is, afterall, merely the ultimate debasing of our current currency to solve a debt problem.

The MMT crowd argues that fiat money, being simply an artifice of governmental authority, can be “printed” (or, rather, created as government debt) with virtual impunity (I know, I’m oversimplifying) and that, as a matter of course, deficit spending is the ultimate source of monetary growth and, thus, a significant controlling factor for economic growth.  In this fashion, they believe that deficit spending is utterly necessary for the health and welfare of the nation, that aggregate savings or investment can’t or won’t occur without an accommodating expansion of the money supply (again, through the practice of deficit spending).

They correspondingly tend to ignore a great many rather basic facts in their “rigorous” mathematical proofs, notably that: 

  • money is not the economy, or that
  • savings, investment, and improved productivity are not in the least dependent on accommodating expansion of the money supply, or that 
  • government spending is prototypically consumptive in nature and, thus, more generally counter-productive to the process of saving and/or investment, or that
  • any artificial manipulation of the money supply inherently distorts market pricing signals (even and especially for money itself) and, thus inevitably leads to the misallocation of resources, or that
  • equitable and sustainable international trade practices – those that can be balanced over the longer term – require a natural equilibrium that can only be established in the use of a reliable and stable means of exchange, or that
  • anything that is managed politically will, more often than not, be disastrously mismanaged.  

Just to name a few concerns.  

Now, I readily admit to being blissfully ignorant of the MMT point of view until Mr. White recently thrust it into my path.  Up to that point, I had merely been agitated by the more typical Keynesian and/or neo-Keynesian lunacy, as habitually demonstrated by the likes of Paul ‘pop goes the weasel‘ Krugman.   As noted in the previously referenced article at the Ludwig von Mises Institute by Robert Murphy, the real problem with the MMT position is that it depends wholly on rhetorical, logical, and mathematical tautologies.  (See also this associated article by Murphy.)

I think Murphy is absolutely correct in this assertion, if only on the basis that (as I note above) the MMT position takes as a basic foundation (or predicate logic) the assumption that the “economy” is a merely a monetary (and thus, not a production/consumption) phenomenon.  In this fashion they can describe a rigid mathematical formulation that accounts for all of the basic monetary accounts, all the while ignoring any and all of the quantitative and qualitative underpinnings that those monetary values are intended to describe; you know, things like actual physical productive output or actual physical labor inputs. 

But, heck, that’s a huge problem with almost all economic study.  Most economists, for instance, necessarily utilize some sort of monetary inflator/deflator indexing system, such as the CPI, in order to (rather lamely) attempt to normalize nominal monetary data so that, the economist’s hope, the rather complex (i.e. tangible) relationships in the economy can be fairly evaluated. 

Why is this such a big problem?  Well, shoot, because – oh, for some reason – we’re always having to guess just how much the various manipulations of the currency have manifestly distorted pricing in the market.  Use of the CPI – again, however lamely – attempts to “normalize” (or eliminate) all of those government and federal reserve induced distortions.  Unfortunately, the CPI is generated by the same entities that brought us the distortions, so you decide just how trustworthy the data really is. 

But, hey, flawed is flawed, no matter the reason.  In this case, you simply cannot ignore (sidestep, walk around, or blink away) the fact that MMT math will always and forever demonstrate things that we know to be absolutely and utterly untrue.  First among them:  infinitely greater deficit spending does not equate to infinitely greater net savings.  Oh, to be sure, the nominal bank balances of (specified, lottery winning) government contractors and entitlement classes might get infinitely larger. 

And, by golly, if nominal growth actually meant anything in this world, they (the lottery winners, at least) would be in great shape.  To be sure, they would be better off than any non-lottery-winner or, of course, our trading partners.  But, we know that isn’t true, else we might all be inclined to print up our own currency for the same reasons, deftly leaving the “in God we Trust” part blank.  Oh, wait, this is supposed to be a monopoly power, isn’t it?  Well, scratch that notion. 

Still, I guess we’d just have to hope that all that (infinitely larger) government spending would actually be productive.  But, I suggest that, just maybe, we’ve been down this road so long that we’ve actually forgotten what real production and growth might actually look like.  

Can we, as I suggested to Mr. White, really ignore the fact that the disproportionate growth in the financial and public sectors or our consistent trading of manufacturing activity for low-wage service sector jobs over the past 40 years may have a little something to do with our fiat/credit/debt and tax-regulated/deficit monetary system?  All the while, our bankers and public servants have consistently told us that “the debt doesn’t matter, we only owe it to ourselves anyway” and that “this is the new economy”.  Uhuh.  My bankrupt, unemployed, and homeless fellow citizens, and perhaps our foreign creditors, beg to differ. 

More to the point, if we can actually and seriously suggest that any debt, regardless of who or what entity it is incurred or intended to be paid by, “doesn’t really matter”, well, we’ve probably missed the whole point of debt, haven’t we?  After all, from the MMT point of view, these current imbalances might be resolved simply by paying them off in a new ex-Fed/new Fed dollar.  Like magic, the old debts vanish and, well, I sure hope you’re on the right side of this massive transfer of (nominal) wealth. 

Worse still, we’ve probably missed the whole point of the Jubilee concept too.  The idea here, I think, isn’t that all debtors (or sinners, eh?) get a nifty “get out of jail free” card conveniently issued once every seven or forty-nine years or, in this case, when the curse is about to choke the life out of you.  Rather than encourage us to rack up maximum debt in advance, the real intent might have been that we would be reminded that any (but, especially perpetual) indebtedness is a curse, not to be taken on (or handed out) lightly. 

My vastly inflated (and deflated, and inflated, and deflated) two cents.

Harry Tuttle

PS – In a prior comment, Mr. White characterized the noted von Mises article as “disappointing”, specifically claiming that the MMT position isn’t that “deficits don’t matter”, but that taxation is the counter-regulating cure and, thus, that the money supply ought to be managed (presumably to some manner of equilibrium) through both mechanisms.  Naturally, I’d like to hear this position developed in more detail.  

My hardfast skepticism, of course, is based in large part on a recognition of human nature, one shared by our founding fathers who insisted that the money supply not be subject to infinite abuse.  Presumably, the Federal Reserve – with or without its “Taylor Rule” – was intended to be exempt from base political influences.  But, human nature is found in any human institution.  The power and authority to coin money, concentrated as it may be, ought to be limited by more than just math and the presumed good intention of the humans in charge.  That, after all, was the whole point of gold and silver.

In the end, any political or financial construct that might permit, facilitate or otherwise encourage the empowerment of one class of citizens at the expense of another will be subject to abuse.  The prescribed limits of power reflected in our Constitution, of course, were intended to thwart those efforts as effectively as possible.  In this context, I see no benefit to the MMT argument as it, ultimately depends wholly on the motivations and discipline of the political class.   In this, it provides no material improvement over the present system.  Quite to the contrary, there would be, I’m quite certain, less discipline and rigor than we now have,which is to say, “not a hell of lot”.  (We might, once again, be reminded of this danger as expounded in this classic exchange.) 


6 responses to “Modern (& Ancient) Monetary Foolishness

  1. The Huffpo quote that Murphy selects to rebut is this

    “a government is the issuer of the currency. The household, on the other hand, is the user. Households are restricted by the need to somehow get money into their bank accounts, or their checks will bounce. The federal government, by contrast, doesn’t “have” or “not have” dollars. There is no vault or lock box where it “keeps” its money. In fact, it makes all of its payments simply by electronically crediting private bank accounts and there is no practical limit to which it can change those numbers up. Spending by the federal government always creates new money in the system, while taxation destroys it. When households and firms pay taxes, the money does not go anywhere; the government simply debits those private bank accounts by electronically reducing the amount of reserves they hold, i.e., by changing the numbers in those bank accounts down.”

    Murphy rebuts it by saying that it is “false.” Then he is forced to admit that it is actually “true.” And finally by rebutting some strawman idea that he is forced to say the Huffpo author “implies.” His incoherency is evidence that he is an agent provocateur in Paul Krugman’s employ whose real intention is to discredit the reasonable statement that you and he both finish with.

    Don’t let yourself be Krugman’s unwitting pawn.


    • You’re cracking me up. Beware, lest you become a Kugmanian Agent Provocatuer (or their unwitting pawn). No, still I hold to my earlier assertion. The current “fact” that the federal government is creating money is only an accidental by-product of the Fed’s monetization. That’s the only sense in which the Huffpo assertion can even be construed as true and it remains subject to the Fed’s decision to buy treasuries, so even then it is merely indirect. Murphy merely (and honestly) acknowledges that. But, for all intents and purposes, it is not the way the system has worked, is intended to work, or – for all we know – is legally allowed to work. That’s hardly “incoherence”, seems to me you’re stretching the point here a bit. Good effort though. For what its worth, my anticipation of a Fed vs Fed showdown sort of boils down to this very topic. When and if the Fed decides to quit monetizing the debt, then we’ll see the MMT crowd up the ante. I’m sure there are plenty of latent anarcho-socialists that would love a true “spread the wealth around” jubilee.


  2. Just to be clear, I don’t have a dog in the MMT fight. Perhaps it was a mistake to make a reference to MMT in Step 0 of my plan. I am tempted to rebut the misrepresentations of MMT above, but I don’t really care enough to spend an hour defending the reputation of some three letter acronym.

    What I am interested in is whether my plan would work. I think you said that you were on board with proposals 3,4 and 5. You weren’t sure about #2, but did want to take money creation away from the banks, which to me sounds like a 100% reserve requirement, so I think #2 is not a stretch.

    So the hang up is #1: debt forgiveness. I think if you do 2-5 without debt forgiveness, a lot of people get debt forgiveness after they are crushed into bankruptcy. Now I have been homeless before, and I’ve been hungry before (although never at the same time), and I acknowledge the salutary effects of real poverty. But #1 is within our power. It would reduce the pain associated with changes 2-5. If you look at steps 2-5 you would notice that “its purpose was not to encourage indebtedness with the promise of a last-minute pardon.” The effects of the plan would be to make future borrowing much more difficult and to dramatically shrink the parasitic financial services sector.

    You are the economist. Does this plan even expand the money supply? If you repay the banks and then raise their reserve requirements, that money does not recirculate and is not inflationary in the Austrian sense of the word. Or am I missing something?

    The only thing worse than having government control the money supply, is having Goldman Sachs control the money supply. I understand your preference for having miners control the money supply, but isn’t 1-5 a step in the right direction? Do you have a better plan or tweaks to this one?

    Or are you just waiting for the ROI on your assault rifle to go up to get you through the next crisis and into a libertarian hard money paradise.


    • Mr. White:

      I’m greatly relieved to know that you aren’t an actual adherent to (yet one more) twist on the oldest scam in the monetary book. I, for one, don’t really understand how it is that we (humans) continue to dig the same holes over and over and over again without the slightest comprehension of why the hole gets so deep.

      As far as your deal points, I’d even go all in on #2. I’d have to go back to get a better sense of what my hesitation was all about. Truthfully, the whole idea behind fractional reserves is just another open door for the whole fiat scam. Of course, to my understanding, it has been the fractional math that has accommodated monetary expansion and while I can’t help but chuckle at your witty characterization of “letting the miners control the money supply”, the whole issue does, in my own thinking, come down to monetary discipline.

      To be sure, the miners themselves may or may not be able to effectively “keep up” with demand for money; alternatively, the could flood the market. Be that as it may, it’s a far cry from the sort of growth that we’ve become used to. And, it’s not really just the money supply, of course, but the underlying debt that is more problematic. More-or-less natural fluctuations in the demand for money could – even in the current construct – be controlled easily enough if we’d quit fiddling with the natural rate of interest. This is the real buggaboo.

      Even in a fiat system, the Fed should have a hands off policy – no Taylor Rule, no Batman sweeping in to rescue us from the recessions that would naturally result from profligate public sector spending. And, here, is my biggest complaint with the whole MMT concept. It is utterly – and I mean absolutely and without question – unnatural to construct or imagine any system where government spending is the key to growth.

      This is “bizzaro world” writ large. It is the final (economic) solution where we all get sent to the slave camps. You think letting GS control (indirectly or not) the money supply is bad. I’m here to tell you that a world in which a growing public sector is required for economic growth has only one destination: “Arbeit Macht Frei“.

      Why? Well, consider that in a normal (i.e. Austrian ideal) economic construct, savings provide the stock fuel for debt. Interest rates reflect and control the supply of available savings relative to the demand for them. There is in this model a natural equilibrium that quickly and almost effortlessless eases lending criteria when the market needs it most and, correspondingly tightens them when too much debt is accumulated, since savings are depleted. The interest rate controls the whole balancing act. Deficit spending, of course, upsets the whole deal, as it should when government begins to consume the nation’s savings. Fiscal discipline is also enforced, because voters understand in the simplest and most direct manner possible, why they can’t afford to buy a house.

      The MMT construct takes that and turns it completely inside-out. As I said, this is bizzaro world, without question. In that twisted reality, I could only afford to buy a house when government decides it needs to spend even more, which boosts the economy (assuming you have a government job or contract). Doesn’t help you much if you’re competing with those ever more important public sector services. Here, UPS and Fed-Ex can’t compete with the USPS. Here, if I don’t get a government job, chances are good that the best job available will be pulling weeds out of my mail-carrier’s garden. Eventually, in the end game, there are no other jobs, merely good Nazi’s and those in the camps.

      Hyperbole, you might think? I don’t think so, but let’s just assume that something we’ve only rarely seen before (politicians who can’t and won’t pander) and there are enough of them to actually enforce some limits to public sector growth. This jubilee (item #1) was (now in hindsight) just a one-off emergency measure needed to sweep away all the bad juju that built up under the corrupt influence of evil bankers…gosh, who’d of ever thought they could be trusted? Were we all mad? Now, we can rest assured that our elected representatives have the helm firmly and securely fixed on the north star and that the business cycle is well and truly extinct and there’s only clear sailing ahead.

      OK, well, sure, now that we’ve edged up to a point where 60% of the voting population is dependent to one extent or another on government spending, it’s not too late to boost that a bit, you know, re-balance the whole economy (not just the housing market’s excess debt load) into some sort of sustainable model. Just how do we actually pull that off? Oh, right, by not spending, by shrinking the money supply, by forcing people of the government teet. Well, we could raise taxes, only causing a ruckus with the minority of voters who actually pay them. Yeah, that way we can keep more people on the dole, no sense in upsetting the whole cart.

      I’m sorry, I just don’t see how it works. There’s no question that the “Austrian Solution” is nearly as painful. Lots of homeless and jobless voters there too. And, by my judgment, lots of socialists in the making. But the MMT position is as purely socialist as any I’ve ever seen. Even if we’re only splitting hairs worrying about bankers vs politicians, I’m mainly looking at two bald heads, I fear.

      In the hypothetical realm, I don’t think we need much beyond the market to adequately maintain a semblance of equilibrium in the market. What government ought to have been doing all along is merely an extension of protecting all of our individual liberties, one of which might be thought to include a sound currency. It is not the government’s job to ensure equitable distribution of an ever expanding list of communal resources, such as my neighbor’s wallet. It is not the government’s job to ensure that my neighbor’s wallet is filled with union wages at the local buggy whip plant. It is not the government’s job to create the illusion that it’s profligate spending doesn’t matter.

      A well-trod path, to be sure, but I’ll bang the drum as long as it’s still needed. It is true that, even with gold and silver, the government would have nominal control over the money supply, subject to the miner’s work ethic and luck, of course. That doesn’t really matter, so long as it is virtually impossible for them to solve each and every problem, large and small, that comes along with another printing exercise. And, let’s face it, a jubilee is hardly anything else.



  3. “It’s hard to know where to begin. In the first place, the above explanation is simply wrong. Strictly speaking, the US federal government does not simply create new dollars when it spends, and it doesn’t destroy dollars when it taxes.”

    So I clicked on the Murphy link above, which turns out to be his rebuttal to a Huffington Post article. Murphy comes on strong with the above sentence, and then has to backpedal like crazy when he admits that the Federal Reserve, by monetizing the debt, does allow the the US federal government to “simply create new dollars when it spends.” In spite of his own first sentence, by his own account Huffington Post (and MMT) is correct on this point and Murphy himself doesn’t know whether he is coming or going.

    Another Mises disappointment.


    • HDW:

      Thanks for continuing the conversation.

      Regarding Murphy’s backpeddling, we are (and, thus, he to is ) forever trying desperately to simplify what is necessarily complicated. Notably, any attempt to quantify the economy is inevitably confronted with the intangible motivations of individual humans. That (as I’ll address more directly in response to your other comment) is, of course, simply the biggest, but not the only difficulty.

      The way money is created and destroyed in our present system is, in search of an apt description: utterly immoderate, extreme, ridiculous, bordering on the psychopathic, senselessly hyper-reactive, pathetically and moronically devoid of any other purpose but to push and pull and manipulate and cajole and tweak and extrude politically acceptible data points that protect the illusion, but not the substance of, stability. On this, I suspect, we both agree.

      Murphy is making (as am I) a “principled argument”, a nuance to be sure, but one that reflects hist correct explanation of the supposed intent of the present system, if not it’s most recent evolution in practice. For the sake of simplicity, he merely related, I believe, the notion that it is not the intent of the current system to afford the government the authority to create or destroy money in the MMT fashion. That it has become a practical effect of recent monetizing of the debt, however, is, of course, an interesting development in the course of current events. And, perhaps we ought to expand on that line of thinking, as it may be likely to prove the ultimate value of the MMT position.

      Regardless, Murphy’s point is that – even when the government taxes or spends anything – there are inevitable distortions that occur. Principally, this stops being a hypothetical “aggregate GDP” math problem. There are payers and recipients in this necessarily redistributive practice. It may be fine to remove all of these presumed intangibles from the math, but it simply doesn’t work out that way in the real world. Thats his point, I think, one shared by any reasonable Austrian or anyone who, ultimately, cares about things like economic liberty.

      In the end, the “principled argument” is best stated with his words, “When people complain that the government isn’t living within its means, they have in mind the idea that its spending is unsustainable, because people won’t tolerate the taxes necessary to support such bloated programs. That is why the average person views a huge government deficit as fundamentally dishonest and irresponsible. One can’t refute this revulsion by pointing out that the government (through the Fed) has the power to simply print up more dollar bills.”

      That’s because, reasonably enough, all such schemes, whether instituted in or out of partnership with the banks, represents a blatant intrusion and infringement upon our individual economic liberty. ‘Nuff said.


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