Monthly Archives: August 2011

Responses to Blog 13: The Modern Money View of Gold and Gold Coins

Thanks for the comments, which were very tightly focused on gold and gold coins. I want to reiterate my summary: gold coins are not an example of a “commodity money” such as the sea shells supposedly chosen by Friday and Crusoe. Rather, they were a “fiat money”, government IOU that happened to be stamped on precious metal. These coins almost always circulated far above the value of the embodied metal; however, that value set a minimum below which the coin’s value could never fall.

That proved handy when a crown was overthrown; or when the coins circulated beyond the crown’s reach. I argued it is not a coincidence that the gold standard, precious metal coins, Mercantilism, wars for foreign conquest, and internecine European wars evolved together. The rise of the modern state, with its ability to conscript warriors and enforce taxes made all of that oh-so-Medieval. Precious metal coins were banished to the dustbins of history.

Yet, today’s goldbugs want to bring it all back. Presumably they love the outfits—anyone for the Society for Creative Anachronism? You too can wear tights and pursue damsels in distress with all the accouterments.

OK more seriously, on to the questions and comments.

Q1: It appears that markets do behave as if gold is money. Is this irrational? Does it reflect rational concern with the stability of fiat money? What is gold if it is not money? Is all this speculation just a “greater fool” theory? And what determines the price of gold, anyway?

Answer: All good questions. First, let me remind you that gold is only one of 25 commodities going through a tulip-bulb type speculative hysteria. Indeed, since 2004 we have lived through the greatest commodities bubble in human history—bar none. Please see my Levy Institute piece

Now you will notice the date—2008—and you might think it is all outdated. From 2004 to 2008 we had the previous all-time biggest bubble. Then Lieberman and Stupak initiated an investigation into Goldman Sachs (oh, you know it had to involve Goldman) and pension funds (say what?). Yours truly played a walk-on part (I worked behind the scenes with their staffs). I was the only economist they could find willing to say “it is not supply and demand” (it never is—and butlers never commit the murder, either). I wrote the piece you can read at their invitation. Pension funds got scared sh*tless. Their members would blame them for the $4 gas at the pumps. They pulled one third of their funds out. Commodities’ prices collapsed (remember oil fell from approx. $150 to $49 a barrel). Then the financial crisis and the government deficit hysteria and Frank Dodd and all manner of other diversions diverted Congress’s eye away from the ball. Given that real estate was no longer a good speculative cake walk, Goldman induced pensions and other managed money back into commodities. And there you go. $4 gas. They boomed. They bubbled. They exploded. The mother of all tulip bulb hysterias.

And gold is dragged out (again) as the hedge against Chairman Bernanke’s helicopters that will surely induce hyperinflation. (If there was ever a sure bet, the bet against USA inflation has got to be it. But that is a topic for another day.)

The gold shoe will drop. Remember, inflation adjusted gold is still below 1980 levels. Gold has never been a good “investment” against inflation. It is a purely speculative bet because gold has no inherent return. Sure, it is somewhat limited in supply and industrial demand (as well as the demand for bright shiny stuff to attach to bodies) grows. But, still, like all other commodities it suffers from a dangerous predicament: mining technologies improve. OK, maybe not enough to halt rising (nominal) prices over time. But enough to make gold a sucker bet.

Besides, governments have locked a huge portion of the world’s gold supply behind bars. They can let gold out anytime they damned well please–for “good behavior” or just to screw the gold bugs. Whether they will is all political. Betting on politics is a fool’s bet, too. Our gold bug in chief (Greenspan) has been put out to pasture. Don’t count on the Bernanke-Geithner team to continue to boost gold prices. (I won’t go into the rumors that Greenspan helped to stabilize gold prices—using the President’s stabilization fund, yes the same one apparently used to bail out Euro banks so that the money market mutual funds wouldn’t “bust the buck”—as that is a bit too close to UFOs and alien abduction. But I can report that reputable commodities markets experts believe it.) The point is that gold is a tiny market and governments are big players. Remember silver? A bigger market that the Hunt brothers managed to almost corner. Those were two Bush W-like cowboy offspring of a Texas oilman. Do you really want to bet that the world’s central bankers have the interests of gold bugs at heart as they make decisions about the proper price of gold? The US government crushed the Hunt brothers as if they were ants. End of silver boom.

So, no, gold is not money and never has been money. It is a commodity, like Tulip bulbs. Remember what happened with tulip bulbs? Think USB drive sticks. They multiplied. Production costs fell. Prices collapsed. Everyone sold, sold, sold. Yes, central banks will end up with egg on their faces. For most of them, it will be no worse than the Fed’s purchases of toxic waste MBSs. Paper losses, covered by Treasury.

If you’ve got some unused gold, sell it now. You will never regret the decision. (Disclaimer: I do not provide investment advice. If you want investment advice, go to Goldman. They can professionally advise you how to lose your life’s earnings. To them.)

Q2: Didn’t use of gold coins reduce forgery?

Answer: Undoubtedly. But it then led to clipping, weighing, Gresham’s Law dynamics, and so on as discussed last week.

Q3: Can you pay taxes in gold?

Answer: Seriously doubt it. Give it a try. But I’ll give you $32 an ounce and you can use the dollars to pay your taxes. Ship it to me, c/o UMKC (better insure it). And, yes, a dollar is always worth a dollar in tax payment. Much better than gold—you never know what that will be worth when it comes time to pay. So ship gold today!

Q4: Was crying down coins inflationary or did it lead to hoarding and thus was deflationary?
Answer: As discussed, there would be some Gresham’s Law dynamics: you hoard heavy coins and push the light ones in payment. Any coins cried down would be pushed (not hoarded). At the public pay offices (where you paid fees, fines, and taxes) you would experience inflation (deliver more coins to pay your tax debt). From what I understand, the impact on prices in “markets” would not be quite one-to-one. In other words, prices would not necessarily rise fully to take account of the lower value at the public pay offices. But I would say that these historical reports are not conclusive. Still we can surmise that the coins that were cried down probably would fall in value so we’d see some market price inflation in terms of these coins. And “velocity” of them would probably increase as everyone tried to offload them. Coins that were not cried down would get hoarded. But that effect was probably not huge—the historical reports are that crying down was well-understood and even more-or-less accepted as a legitimate means of increasing the tax burden. The story is that the population accepted it so long as it was not done too often. Finally recall that coins had no nominal value printed on them—so the crown had to announce the value at which they’d be accepted. And recall that entire coinages would frequently be called-in for recoinage. It is highly misleading to focus on coins. They were rarely important. Most taxes were paid in tallies (which could not be cried down since the nominal value was cut into stock and stub) and most private transactions took place in bills of exchange or as credits and debits (bar tallies, for example)—again all nominal.

Thanks, again, for comments. Next week: IOUs denominated in the domestic currency: government and private.

A Tale of Three Germanys: Is Germany Preparing to Exit the Euro?

Hans-Olaf Henkel’s piece in today’s Financial Times is making waves. Okay, Henkel is an odious man, but my view, which was once considered borderline crazy, is now getting more serious consideration. The Germans were willing to go into a currency union because by construction that agreement removed the weapon exchange rate depreciation from its competitors. German real wage discipline, labor productivity gains, and engineering innovation could not be undercut at the stroke of a pen. Recall that there are basically 3 Germanys:

Germany #1 being the Bundesbank and “finanzkapital”, which retains huge phobias about the recurrence of Weimar-style hyperinflation, and retains an almost theological belief in “sound money”.  It is the Germany of closet gold bugs and Austrian economists, who believe in hard money, “responsible” fiscal policy and the like, and who were basically always antithetical to the euro as a big and broad union.  Then you had the “Europeanists”, led by Kohl who essentially argued that you solve the “German problem” by binding Germany ever more fully into a pan-European framework, the currency union being a key part of that.  The swing vote was Germany #3, Industrial Germany which bought into the idea of the currency union precisely because it locked Germany’s industrial competitors at a fixed exchange and removed the expedient of devaluation.

It seems to me, however, that the swing vote is beginning to have 2nd thoughts, as they wrongly consider the “costs” to the country through these repeated bailouts.  This concern seems to be overriding the obvious benefits of having “profligate” Mediterranean countries buying yet more German imports.  It is striking to me that Henkel, a big player in the German industrial complex, is now leading the charge for withdrawal.  It might suggest that an important political dynamic in Germany has shifted. German policy makers would have to conclude there is no plausible exchange rate for the Neuro and the Pseudo (or Soro?) that would cause a problem for their current account surplus and their export led growth strategy. Or they would have to conclude that is the “least worst” option given the political backlash of more subsidized loans to Greece, Portugal, etc.
The other point is this:  Multinationals don’t care about where demand comes from as long as it is increasing somewhere and they are allowed to go after it. Labor arbitrage is the additional icing on the cake.  So policies that build unsustainable imbalances between countries and have bad social outcomes are fine with them as long as they can roam the globe freely to take advantage of the demand wherever it pops up.  

This probably remains true so long as the ultimate price of these polices don’t get shared with the multinational (in the form of taxation or additional regulation). So far the multinationals have it good in that costs are falling disproportionately on others. That could well change if there was a “solidarity” tax imposed on profits instead of the populace.

The Washington Mutual Wish List: Optimizing a Criminogenic Environment

By William K. Black

(Cross-posted from

On November 7, 2007, the Financial Services Roundtable released its “The Blueprint for U.S. Financial Competitiveness.” I explained in a three-part series of columns how Federal Home Loan Bank Board Chairman Ed Gray and Office of Thrift Supervision Director Tim Ryan led crackdowns on the “control frauds” that caused the S&L debacle. I emphasized how Gray did so in the face of enormous political opposition from the Reagan administration, Speaker of the House Jim Wright, a majority of the House of Representatives, and the “Keating Five.” One of the odd moments during these political attacks was that a Republican Representative from the Dallas area requested a meeting with Gray when Speaker Wright’s attacks on Gray’s reregulation of the industry and actions against the control frauds were becoming public an notorious. In my naiveté, I thought that Bartlett requested the meeting to support his fellow Republican, Gray. Of course, Bartlett’s purpose was the opposite. He was enraged by our efforts against the Texas control frauds and wanted us to back off. Years later, after a stint as Dallas’ mayor, the Financial Services Roundtable made Bartlett its head, a position he continues to occupy.

Naturally, Bartlett learned nothing productive from being proven disastrously wrong about the S&L debacle. The financial industry chose him as its lead representative because he never learned. He remains an implacable anti-regulator.

The Blueprint describes and situates this anti-regulatory effort, which was the product of a “Blue Ribbon Commission” co-chaired by “Richard M. Kovacevich, Chairman, Wells Fargo & Company; and James Dimon, Chairman and CEO, JPMorgan Chase and Co.”

“Within the past year, three reports on U.S. financial competitiveness—including the Bloomberg-Schumer Report—have called for a system of principles-based regulation. Last March, Treasury Secretary Henry M. Paulson, Jr. said, “[W]e should also consider whether it would be practically possible and beneficial to move to a more principles-based regulatory system as we see working in other parts of the world.”

The Blueprint was part of a coordinated anti-regulatory effort with Goldman Sachs alums at the U.S. Treasury Department and the Chamber of Commerce.

“Three major studies – the bipartisan report by New York Mayor Michael R. Bloomberg and New York Senator Charles E. Schumer (D-NY), the U.S. Chamber report, and the study by the Committee on Capital Markets – have concluded that the United States is losing its position as the world’s leading financial marketplace.1”

The text of the footnote shows the “race to the bottom” rationale that characterized each of these purportedly “independent” “studies.”

“1 Michael R. Bloomberg and Charles E. Schumer, Sustaining New York’s and the US’ Global Financial Services Leadership, January 2007 at; hereafter, Bloomberg-Schumer Report. See also Michael R. Bloomberg and Charles E. Schumer, “To Save New York, Learn from London,” Wall Street Journal, November 1, 2006, p. A-18; Committee on Capital Markets Regulation, Interim Report, November 2006 at; hereafter, Interim Report; Commission on the Regulation of U.S. Capital Markets in the 21st Century (U.S. Chamber of Commerce), Report and Recommendations, March 2007 at; hereafter, U.S. Chamber Report.”

“To Save New York, Learn from London.” Mayor Bloomberg and Senator Schumer (D. NY) urged the U.S. to adopt the UK’s approach to financial regulation, which during this era was the three “de’s” – deregulation, desupervision, and de facto decriminalization. Henry Paulson was confirmed by the Senate as Bush’s Treasury Secretary on June 28, 2006. Paulson’s top priority was deregulation. In particular, he worked to weaken Sarbanes-Oxley (SoX) on an urgent basis. Paulson’s strategy was to generate a series of anti-regulatory studies and proposals that would serve as the basis for a broad legislative assault on what remained of financial regulation. He was gearing up to propose this assault when the markets collapsed. This led to the March 31, 2008 roll out of the Treasury’s incoherent “reform” package. The Paulson plan was incoherent for an excellent reason. His plan’s analysis consisted overwhelmingly of an embrace of the standard anti-regulatory “race to the bottom” dynamic contained in the Blueprint, the Bloomberg-Schumer writings, and the Chamber of Commerce, married to a grudging concession that financial regulation had been too weak. This made no sense, for the U.S. and most of the Western world had just run a real world experiment in which the three “de’s” had once again proven intensely criminogenic precisely because they invariably lead to the “bottom.” Paulson’s plan was dead on arrival.

By late March 2008, the absurdity of embracing the anti-regulatory “race to the bottom” – and then admitting that the dynamic was disastrous – was so obvious that the public reacted with scorn to the Paulson plan. The Blueprint’s analytics presented in support of the race to the bottom were even worse than the analytics presented by Paulson, for they did not contain any concession that such a race must cause regulation to become catastrophically weak and lead to crises. The Blueprint was very late in the game – November 2007. The bubble had collapsed over a year ago. Most large mortgage banks had failed – catastrophically. Nonprime mortgage defaults were surging. The secondary market in nonprime mortgages collapsed. The authors of the Blueprint knew that the central dynamic they were embracing – the purported “need” to “win” the anti-regulatory race to the bottom – had again proven disastrous.

“More recently, the liquidity crisis and ensuing credit crunch in several significant capital markets sectors has revealed weaknesses in the regulatory system. Many homeowners have been confronted with the prospect of foreclosure, and U.S. financial markets have been roiled by problems that can be traced to aggressive practices by some firms, gaps between national and state regulation of the U.S. mortgage industry, and opaqueness in some structured financial instruments innovations. Many of these problems also have impacted the broader credit and capital markets, both domestically and globally.”

The passage illustrates the Blueprint’s authors’ refusal to be honest with the reader. They embraced euphemisms for fraud (“aggressive practices”) and gravely understated the financial crisis that was sweeping like a tornado through the financial markets. They ignored how the industry had deliberately ignored the FBI’s September 2004 warning that the developing “epidemic” of mortgage fraud would cause a financial “crisis.” They ignored how the fraud epidemic, generated overwhelmingly by lenders and their agents, hyper-inflated the largest bubble in financial history. But all of this pales against the Blueprint’s fundamental dishonesty. Why were there “gaps” between national and state regulation? The mortgage lending industry deliberately cultivated a race to the bottom by creating regulatory black holes and because the industry successfully urged Fed Chairmen Greenspan and Bernanke not to use their statutory authority under HOEPA to ban fraudulent “liar’s” loans. Why were “structured financial instrument innovations” “opaque?” The financial industry demanded passage of the Commodities Futures Modernization Act of 2000 for the specific purpose of making the credit default swap (CDS) market wholly opaque. The express goal of the Act was to prevent all federal and state regulation of CDS. The Act, as the industry intended, created a regulatory black hole. The Fed economist who testified to Congress premised the Fed’s support for this obscene Act on the purported need to win the race to the bottom in competition with the City of London.

The problem that the Blueprint identified was the insane idea that because the UK, Germany, Ireland, and Iceland were racing toward the anti-regulatory bottom and creating an extraordinarily criminogenic environment the U.S. should respond by creating an even more criminogenic anti-regulatory environment so that more of the accounting control fraud would take place in the U.S. and cause even more catastrophic losses here instead of in Europe. The Blueprint is bizarre primarily because it calls for the U.S. to embrace even more fully the anti- regulatory bottom – even though the disastrous consequences of doing so were obvious at the time the Blueprint was published. The Blueprint (implicitly) identified the problem (the anti-regulatory race to the bottom to “win” global competitiveness – and called it the solution. This was significantly insane.

The Blueprint, having found that the anti-regulatory race to the bottom was suicidal, urged the U.S. to run faster.

“External factors threatening the competitive position of U.S. financial firms and the stability of financial markets include the relentless growth in international financial services competition, rapidly expanding foreign financial markets, and foreign regulatory regimes purposefully designed to adjust quickly to market developments.”

This is nonsensical. The “competitive position of U.S. financial firms” would have been aided immeasurably by competent financial regulation, of the kind we employed in 1990-1991 to forbid S&Ls to make liar’s loans. The actions that most impaired the competitive position of U.S. financial firms were the three “de’s.” Our firms would have had a decisive competitive advantage over European banks, to an extent not seen since the early post-World War II years, had we not destroyed effective financial regulation.

Note the lack of logical coherence in the sentence quoted above. The Blueprint concedes that Europe’s race to the bottom “threaten[s] … the stability of financial markets.” That concession is true and it has enormous analytical importance (that escaped the authors). It means that the Europe’s anti-regulatory race to the bottom does not “threaten” “the competitive position of U.S. financial firms.” Indeed, it must do the opposite. The European banks are inherently destroying themselves as competitive threats when they destroy effective financial regulation because such an action is so criminogenic. The Blueprint’s fundamental incoherence leads the authors to recommend anti-regulatory policies that are the opposite of what their logic (if made internally consistent) would recommend. The authors’ total blindness to the internal inconsistency of their logic is revealed in this sentence.

Similarly, if Europe’s anti-regulatory race has led to “regulatory regimes” that serve as cheerleaders (“adjust quickly”) for criminogenic lending practices (“market developments”) then this is the last thing the U.S. should emulate. The way to enhance both U.S. competitiveness and financial stability, particularly if our competitors are racing to the criminogenic bottom, is to employ effective financial regulation. It’s a lot like every mother advises her child: “And if Johnny jumps off a cliff do you think that you should also jump off the cliff?”

We all know that the CEOs who co-chaired the “Blue Ribbon” group that produced the Blueprint did not write the Blueprint. Who actually produced this blueprint for creating an even ore criminogenic environment sure to produce recurrent, intensifying financial crises?

“The Roundtable is grateful for the outstanding guidance provided throughout this project by William A. Longbrake of Washington Mutual, Inc., who also is the Anthony T. Cluff Senior Policy Advisor to The Financial Services Roundtable.”

Yes, unintentional self-parody remains unbeatable. The Financial Services Roundtable, with 100 massive members, chose as its “Senior Policy Advisor” and go-to guy on the Blueprint a WaMu’s Vice Chairman. Longbrake served as the Chairman of The Financial Services Roundtable’s Housing Policy Council during the hyper-inflation of the housing bubble. When you need expertise on creating the most intensely criminogenic environment possible it only makes sense to go to a bank that made, purchased, and sold hundreds of thousands of fraudulent mortgage loans. Longbrake’s bio describes his work for WaMu.

“From 1982 to 1994 Longbrake was chief financial officer of Washington Mutual except for a two-year stint when he was the principal executive responsible for retail banking and home lending. When he returned to Washington Mutual from the FDIC in 1996 he resumed the position of chief financial officer until 2002 when he became the bank’s first chief enterprise risk officer. In 2001, Longbrake was named CFO of the Year in the Driving Revenue Growth category by CFO Magazine. From 2004 until retirement he served in a non-executive position as the company’s liaison with regulators, legislators, and industry trade organizations.”

Kerry Killinger, WaMu’s Chairman and CEO, was a member of the “Blue Ribbon” group that created the Blueprint for disaster.

Bill Black is the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.

Bill writes a column for Benzinga every Monday. His other academic articles, congressional testimony, and musings about the financial crisis can be found at his Social Science Research Network author page and at the blog New Economic Perspectives.

Matchmaker, Matchmaker Find Me a Job

By Stephanie Kelton

Good news. Republicans have just unveiled a bold new plan (see below) to create jobs in the private sector. Don’t worry, it isn’t another “wasteful” stimulus package that hires people to repair roads and bridges or helps state and local governments hold onto their teachers and firefighters. This one won’t cost the government a dime! It’s a simple idea, really. A good old-fasioned meet-and-greet, where throngs of unemployed Americans can claw their way through a crowd of equally desperate men and women looking to land the perfect mate. I mean a reasonable match. I mean any job whatsoever.

Are these people delusional? (rhetorical) What, exactly, is it that prevents them from understanding the root of the problem? Econ 101. Sales Create Jobs. Income Creates Sales. So easy a caveman can do it.

We don’t need to introduce employers to the unemployed — they can throw a rock and hit one every 10 feet. We need to introduce employers to new customers. Sales create jobs. The problem, as Cullen Roche points out again today, is that too many households are still struggling with high debt levels. As Cullen said, “spenders have become savers,” and this is hurting the economy. Until households finish de-leveraging (restoring balance sheets by paying down debt), there will be no new source of demand — i.e. customers — to support private businesses.

The government could provide that demand — directly, through a job guarantee program modeled on the WPA, or indirectly, through a full payroll tax holiday and another round of revenue sharing for the states. But it looks like the deficit owls are the only ones prepared to support those kinds of bold initiatives. Until then, Congresswomen like Lynn Jenkins (my own “representative,” by the way) will settle for a pathetic event that promises to pair hundreds of potential employers with thousands of job seekers.

Dear Ms. Kelton,
It is my pleasure to announce the 2nd Annual Kansas 2nd District Jobs Fair.  If you are a job seeker looking for employment or an employer looking for employees, I invite you to join us on Thursday, September 1st at the Topeka Expocentre Agriculture Hall.  
As a CPA, I know the key to turning the economy around is not more government spending, but working with the private sector to create jobs. In order to get our economy back on track, we must first get America and Kansas back to work.  
This Jobs Fair will provide an unique opportunity to meet with some of the leading job creators in the state of Kansas.  There are retailers and manufacturers, service industry representatives, members from healthcare and not-for-profit companies, cities and universities, as well as financial services providers all gathered to help you find employment.  There will be over 60 companies looking to fill hundreds of jobs! 
Unlike many Jobs Fairs, participation is free of charge for both businesses and job seekers. I am hopeful that this event will prove an invaluable resource for you, your friends, and family. Please bring your resume and come explore job opportunities.
Congresswoman Lynn Jenkins’ 2011 Jobs Fair
Thursday, September 1st 
10am – 1pm
Topeka Expocentre Agricultural Hall
One Expocentre Drive
17th & Topeka Blvd
Topeka, KS
Over 1,000 job-seekers came out to last year’s Jobs Fair– providing a great opportunity for employers and job-seekers to meet. Whether you are looking for a full-time, part-time, or temporary position, do not miss this great opportunity to connect with local employers who are hiring. 
I hope to see you there! 

Lynn Jenkins, CPA
Member of Congress

Today’s Modern Money Primer

The second part in Wray’s discussion on the origin of coins is now available. If you are new, check out the Modern Money Primer. You’ll find part one of this series, as well as the most thorough introduction to MMT, short of enrolling at UMKC as a grad student.

MMP Blog #13: Commodity Money Coins? Metalism versus Nominalism, Part Two

By L. Randall Wray

Last week we examined the origins of coins, arguing that coinage is a relatively recent development. From the beginning, coins did have precious metal content. We examined a hypothesis for that, because from the MMT view, the “money thing” is simply a “token” or record of debt. If that is true, why “stamp” the record on precious metal? For thousands of years, debts were recorded on clay or wood or paper. Why the switch? We argued that the origins of coins in ancient Greece must be placed in the specific historical context of that society. Use of precious metal was not a coincidence, but also was not consistent with the commodity money view. While it is true that use of precious metal was important and perhaps even critical, this was for social reasons and was tied to the rise of the democratic polis. This week, we examine coinage from Roman times to the present in Western society.

Roman coins also contained precious metal. But there is very little doubt that Roman law adopted what is called “nominalism”—the nominal value of the coin is determined by the authorities, not by the value of embodied metal in the coin (termed “metalism”). The coin system was well-regulated and although precious metal content changed across coinages, there was no significant problem with debasement or inflation. In Roman law, one could deposit a sack of particular coins (in sacculo) and when repaid demand the same coins to be returned (vindication). However, if one were owed a sum of money (rather than specific coins), one had to accept in payment any combination of coins tendered that were “money of the realm”—officially sanctioned coins with payment enforced in court (condictio).

This practice continued through the early modern period, in which one deposited for safe keeping either sealed sacks of coins (and could demand exactly the same coins back in the still-sealed bag) or loose coins (in which case, any legal coins had to be accepted). Hence, “nominalism” prevailed in the general, although what appears to be a form of “metalism” applied to specific coins in sacculo.*

In reality, it had more to do with the view that coins were a “moveable chattel”, something the owner had a property interest in. However, once the owner’s loose coins were mixed with other coins, there was “no earmark”—no way of determining specific ownership and hence the claimant only had a claim to be repaid in legal money—the legalis moneta Angliae, for example in England, which was stipulated to be a sum of “sterlings”. There was no sterling coin (indeed, England did not even coin the Pound, its money of account), rather, the debt was paid up by providing the appropriate sum of coins declared lawful money by the Crown—and could include foreign coins—at the nominal value dictated by the King.

The authorities that issued coins were free to change the metal content at each coinage; penalties for refusing to accept a sovereign’s coin in payment at the value stated by the sovereign were severe (often, death). Still, there is the historical paradox that when the King was paid in coin (in fees, fines and taxes), he would have them weighed—and reject or accept at lower value the coins that were low weight. If coins were really valued nominally, why bother weighing them? Why did the issuer—the King—appear to have a double standard, one nominalist, one metalist?

In private circulation, sellers also favored “heavy” coins—those that weighed more, or that were of higher fineness (more precious metal content). They certainly did not want to find themselves in the situation of trying to make payments to the Crown with low weight coins. Hence, a “Gresham’s Law” would operate: everyone wanted to pay in “light” coins, but to be paid in “heavy coins”. There was thus obvious concern with the metal content of coins, and fairly accurate (and quite tiny) scales were manufactured and sold to weigh coins individually. This makes it appear to modern historians (and economists) that “metalism” reigned: the value of coins was determined by metal content.

And yet we see in the courts rulings indications that the law favored a nominalist interpretation: any legal coin had to be accepted. And we see Kings who imposed long prison terms (the sentence was usually to serve “at the King’s pleasure”—a nice way of putting it! One can just imagine the King’s pleasure at holding indefinitely those who refused his coins.), or death, for refusing any coin deemed legal. It all appears so confusing! Was it nominal or was it metal?

The final piece of the puzzle appears to be this: until modern minting techniques were invented (including milling and stamping), it was relatively easy to “clip” coins—cut some of the metal off the edge. They could also be rubbed to collect grains of the metal. (Even normal wear and tear rapidly reduced metal content; gold coins in particular were soft. For that reason they were particularly ill-suited as an “efficient medium of exchange”—yet another reason to doubt the metalist story.)

This is why the King had them weighed to test for clipping. (As you can imagine the penalty for clipping was severe, including death.) If he did not, he would be the victim of Gresham’s Law; each time he recoined he would have less precious metal to work with. But because he weighed the coins, everyone else also had to avoid being on the wrong side of Gresham’s Law. Again, far from being an “efficient medium of exchange”, we find that use of precious metals set up a destructive dynamic that would only finally resolved with the move to paper money! (Actually, even paper is less than ideal; perhaps some readers have experienced problems getting older paper money accepted—as I did even in Italy before it adopted the euro—due to Gresham Law dynamics. Thank goodness for computers and keystrokes and LEDs.)

Kings sometimes made those dynamics worse—by recanting his promise to accept his old coined IOUs at previously agreed upon values. This was the practice of “crying down” the coins. Until recent times, coins did not have the nominal value stamped on them—they were worth what the King said they were worth at his “pay houses”. To effectively double the tax burden, he could announce that all the outstanding coins were worth only half as much as their previous value. Since this was the prerogative of the sovereign, holders could face some uncertainty over the nominal value. This was another reason to accept only heavy coins—no matter how much the King cried down the coins, the floor value would be equal to the value of the metallic content. Normally, however, the coins would circulate at the higher nominal value set by the sovereign, and enforced by the court and the threat of severe penalties for refusing to accept the coins at that value.

There is also one more aspect to the story. With the rise of the Regal predecessors to our modern state, there were the twin and related phenomena of Mercantilism and foreign wars. Within an empire or state, the sovereign’s IOUs are sufficient “money things”: so long as the sovereign takes them in payment, its subjects or citizens will also accept them. Any “token” will do—it can be metal, paper, or electronic entries. But outside the boundaries of the authority, mere tokens might not be accepted at all. In some respects, international trade and international payments are more akin to barter unless there is some universally accepted “token” (like the US Dollar today).

Put it this way: why would anyone in France want the IOU of France’s sworn enemy, the King of England? Outside England, the King’s coins might circulate only at the value of precious metal contained in them. Metalism as a theory might well apply as a sort of floor to the value of a King’s IOU: at worst, it cannot fall in value much below gold content as it can be melted for bullion.

And that leads us to the policy of Mercantilism, and also to the conquest of the New World. Why would a nation want to export its output, only to have silver and gold return to fill the King’s coffers? And why the rush to the New World to get gold and silver? Because the gold and silver were needed to conduct the foreign wars, which required the hiring of mercenary armies and the purchase of all the supplies needed to support those armies in foreign lands. (England did not have huge aircraft to parachute the troops and supplies into France—instead they hired mainland troops and bought the supplies from the local outfitters.) There was a nice vicious circle in all this: the wars were fought both by and for gold and silver!

And it made for a monetary mess in the home country. The sovereign was always short of gold and silver, hence had a strong incentive to debase the currency (to preserve metal to fund the wars), while preferring payment in the heaviest coins. The population had a strong incentive to refuse the light coins in payment, while hoarding the heavy coins. Or, sellers could try to maintain two sets of prices—a lower one for heavy coins and a high one for light coins. But that meant toying with the gallows.

The mess was resolved only very gradually with the rise of the modern nation state, a clear adoption of nominalism in coinage, and—finally—with abandonment of the long practiced phenomenon of including precious metal in coins.

And with that we finally got our “efficient media of exchange”: pure IOUs recorded electronically. Precious metal coins were always records of IOUs, but they were imperfect. And boy have they misled historians and economists!

Admittedly, I have not yet made a thorough case that money must be an IOU, not a commodity. We need some more building blocks first.

* I thank Chris Desan, David Fox, and other participants of a recent seminar at Cambridge University for the discussion I draw upon here.


By L. Randall Wray

Thanks for all the responses—this might have been a record number for the MMP. Coins are fascinating. I have to admit that even though my approach downplays the role of coins in monetary systems, I always head right to the coin displays in the museums. Indeed, when in Cambridge recently I was treated to a quick tour of the collection of the late Phillip Grierson, who not only was among the greatest numismatists who ever lived but also one of those who recognized that the origins of money are not to be found in markets. Rather, it was his hypothesis that money came out of the penal system (debts again!)—a view that I believe must be correct. But that is a topic for another day.

Today I will address the first set of comments on the MMT approach to “commodity money coins”. In Blog 12 I began to explain why the MMT view is that gold or silver coins are not examples of commodity money. Rather, they are simply IOUs of the issuer that happen to be stamped on precious metal.
On to the comments and questions.

Q1: What is MMT’s view of the reserve currency?

Answer: Well, today it is the Dollar; a century ago it was the Pound. MMT principles apply—it is a sovereign currency issued through keystrokes. The issuer of the reserve currency can either float (in which case the issuer does not promise to convert at a fixed exchange rate) or it can fix. As I have argued, fixing reduces domestic policy space. Reserve status probably increases external demand for the nation’s currency—which is used for international clearing. To satisfy that demand, the reserve currency issuer (the US today) either supplies the currency through the capital account (lending) or the current account (trade deficit, for example).

Many believe this allows the nation that issues the reserve currency to “get something for nothing”, often called “seigniorage”. This is largely false—did American consumers get free goods and services over the past decade as the US ran current account deficits? No, of course not. They are left with a mountain of debt. Did the US government get “something for nothing”? Well, perhaps—but all sovereign governments can be said to get something for nothing, since they purchase by keystrokes.

But that is not seigniorage—it results from the fact that sovereign government imposes liabilities on its population–taxes, fees, and fines. The US does it; but so does Turkey. Sovereign government first puts its population in debt, then it uses keystrokes to move resources to the public sector and its keystrokes create its IOUs that provide the means through which taxpayers can retire their tax debt. The sovereign’s currency can circulate outside the country to varying degrees, but that is ultimately because the sovereign’s citizens need it to pay taxes domestically—since foreigners are not normally subject to the tax.

So in principle the issuer of the reserve currency is not unique—although the external demand for the reserve currency is greater. We’ll study this more later; think of this brief response as an appetizer that is no doubt going to spur some “hegemonic” objections!

Q2: The CPI has increased by a factor of 7 since 1966. Is the currency still a store of value?

Answer: Well, sure it is–but as the commentator noted, it is not a good store of value in terms of purchasing power of a basket of consumer goods and services over a period as long as a half century. We can quibble about the use of the CPI as a measure of inflation—it has well known problems we will not pursue in detail here.

As Keynes argued, you need some “stickiness” of wages and prices in the money of account—or you might abandon money. That is what can happen in a hyperinflation. You try to find something else. But clearly except for a few gold bugs, US inflation since 1966 has been sufficiently low that the Dollar remained a useful money of account, and currency has been voluntarily held.

In truth, economists are hard-pressed to find negative economic effects from inflation at rates under, say, 40% per year. But clearly people do not like inflation when it gets to double digits.

Returning to Keynes, he said that no one would hold money as a store of value in the absence of uncertainty. Holding wealth in a highly liquid form like money makes sense only if you are uncertain, and even scared, about the future. In a financial crisis, everyone runs to cash. It gives a very low return, but that is better than a huge loss!

If you wanted a good store of wealth, and you were making a decision back in 1966 as to the portfolio you would hold until 2011, it is unlikely that you would have held much cash. There would have been many assets that would be better stores of value. However, if we are talking about a desirable portfolio to be held over the next few months, you probably would hold some cash. There is a trade-off between liquidity and return.

I know the gold bugs like gold; but those who bought it in 1980 were kicking themselves for the next 30 years, and still have not recouped their losses. In general, commodity prices fall over time in real terms—they are terrible inflation hedges—plus they have storage costs.

Let me just say I have no knowledge of Dungeons and Dragons—I suppose it is a board game like Monopoly–so I cannot answer Neil’s question about gold, silver, and copper pieces. But I think Monopoly still uses the same paper currency and same prices and rents? Not sure what the question is. Games don’t have to have inflation? OK—games have rules. I suppose inflation is not built into the rules of those games.

On Karl’s statement that past labor is not equivalent to today’s labor, hence, it is not surprising that wages and prices are higher today, I do believe he is onto a point.

We must adjust the CPI or other measures of price for quality improvements. How much would a modern laptop have cost in 1966? Millions of dollars? Billions? As Warren Mosler always jokes, your IPhone has more electronic wizardry than NASA was able to muster for the trips to the moon. The CPI is more of an art than a science—since we have to put prices on things that did not exist, and make imaginary quality adjustments.

Further there is something called the Baumol disease. A symphony orchestra back in Mozart’s time was as large as one today—give or take a few. And it took about the same time to perform a piece—depending on the conductor. There has been no productivity improvement. Yet, workers in other fields are infinitely more productive than they were in Mozart’s day. There is a similar problem in many other areas, mostly services where you really cannot improve productivity much (think barbers, teachers, doctors). The relative price of these things should have become insanely expensive over the past 200 years relative to, say, manufacturing output with tremendous productivity gains. And if we rewarded workers only for productivity gains, our musicians would still be working for Mozart era wages. It still takes one barber to keep one hundred heads of hair looking good. By contrast, a single farmer feeds as many hungry consumers as 100 farmers used to feed. But the farmer and barber still earn about the same living (give or take). Rather than vastly underpaying the farmer we choose to overpay the barber. At the same time, the Baumol disease thesis is that an ever growing portion of our nation’s output is in those sectors that suffer the disease. So we overpay ever more workers in those sectors. The trend for wages (and, thus, prices) is up.

(Wages grow faster than productivity because we have those low productivity sectors that get the same wage increases. And to carry the analysis a bit further, the thesis is that over time government tends to take over more of these “diseased” sectors—so government tends to grow as a percent of GDP. This is not meant to be a criticism, and of course there are countervailing tendencies. But think of healthcare and projected tens of trillions of dollars of government budget deficits and you’ve got the picture.)

Blame the concert violinist for erosion of the value of the dollar.

In a sense, a part of inflation is to even these things out—otherwise, all our musicians and artists would live like paupers relative to our factory workers. Think of it this way, inflation is the cost of preserving culture. Occasionally we like fine art, too. And we like our Kindergarten teachers to maintain class size of 15 kids. To keep pace with productivity growth in manufacturing, each Kindergarten teacher today would have to have hundreds of 5 years olds crowded into every classroom. It didn’t happen. (Well, with state and local government budget cuts, it might.)

To preserve “inefficiency” in the Kindergarten classroom we need inflation.

Sorry, that was rather long-winded, but the comment by Karl was on the right track.

Finally, as Neil hints, some inflation is probably good. Keynes argued it helps to encourage investment, by increasing nominal returns and making it easier to service debt. When I graduated from college with mountains of student loan debt, I really appreciated the Carter years’ inflation! The alternative would be rapidly declining prices in every sector that does not suffer from the Baumol disease—but deflation itself is a dangerous disease. This would be like fighting the common cold with a good dose of terminal cancer.

Q3: What about Chinese holding of Dollars—what is the impact on the US?

Answer: I want to hold off on this a bit, but clearly the Chinese do not really lend Dollars to the US and especially not to the US government. Every dollar they got came from us. Our problem is that we allow imports to displace US workers—we could put them to work in other jobs. But instead we leave a lot of them unemployed. We do not fully enjoy the advantages of running a trade deficit—consuming more than we produce—because we operate our economy below capacity and keep millions unemployed. But clearly the answer is not to go begging to the Chinese to keep those dollars flowing to the US (as VP Biden is doing right now)! Rather it is to put the unemployed to work doing useful things to improve our living standards.

Q4: Could use of gold be linked to anti-counterfeiting measures?

Answer: That sounds right to me! Yes, government could attempt to control gold supply making it harder to counterfeit coins.

Q5: What about the state of Utah accepting gold coins?

Answer: Heck, I’ll accept them, too. Send me yours! Worst case scenario is that gold prices will collapse and I’ll have to use the coins at nominal value. More likely, they will remain collector’s items.

I also like platinum: I’d like Treasury to coin ten $1 trillion dollar coins, and give me one. The other nine could buy back Treasuries so that our debt hysterians could worry about something else for a while.

Q6: Today, are there two “commodities” serving as medium of exchange, currency and demand deposits?

Answer: Neither are commodities. Sorry, we are using the word commodities in two senses. One is the Wall Street terminology: “natural resource” inputs to production: oil, soybeans, corn, copper, silver…and, yes, gold. These are now the subject of a speculative boom driven by pension funds buying futures contracts. The other is in the sense of “products of labor, produced for sale in markets”. But on neither definition is currency nor demand deposits an example of a “commodity”. Both are IOUs, either stamped on base metal or paper, or recorded electronically through keystrokes.

Q 7: In what sense does the state go into debt to the public when it issues money?

Answer: It must accept back its own IOUs. What it “owes” you is the right to redeem its IOU for the tax debt it imposed on you. Government “redeems” by accepting its own IOU. All debtors must accept back in payment their own IOUs. Even government. Refusal to accept is a default.

Q8: Were clipped coins accepted at original value?

Answer: Yes. And No. More on Gresham’s Law next week. Roman Law was nominalist as I discussed. Deviations from nominalism, however, were common in early modern society. But that does not make metalism correct. Read next week.

To finish up, a few more comments and responses:

Thanks much to Ramanan for providing citations to the St Augustine statement on Christ’s coins. I will update the blog. : St. Augustin on Sermon on the Mount, Harmony of the Gospels and Homilies on the Gospels: Nicene and Post-Nicene Fathers of the Christian Church, Part 6″ (Sermon XL) ; Just above Sermon XLI here.

Alternatively; toward the end of the page: Christ’s coin is man. In him is Christ’s image, in him Christ’s Name, Christ’s gifts, Christ’s rules of duty

A commentator noted: “People as coins” just might be a rabbinic allusion: “When Caesar puts his image on a thousand coins, they all look alike. But when God puts His image on a thousand people, they all come out different.”

LRW: Thanks, I will look into this.

Dave said: People might find this of interest:

LRW: I agree! His view of money is similar to mine, I believe. In a word, debt.

Lewis, you appear to be channeling A. Mitchell Innes. Good job.

Darwin: yes, if you play by the rules on a gold standard, the quantity of gold constrains coin issue. You can call in gold, you can raise the price for gold paid at the mint, you can put less gold in your coins, and you can use hazelwood tally sticks and bar tabs. All of the above.

Anon Marx: I agree with you. Some Marxists do want to find commodity money in Marx. I do not. Marx’s whole analysis requires nominalism. I interpret his statements on gold as contingent—special cases having to do with operation of the gold standard.

Oil Drum Anon: “I think this particular installment of the MMP is weak…. Where is there an axiomatic development of MMT, uncluttered by asides about ancient history?

Answer: Well, Anonymous you’ve found the right site but you started in on #12. Begin at the Beginning. (Hint: they are numbered consecutively, so the beginning would be #1.) Further, many or even most people have this belief about commodity coins of the past, and believe that all would be right with the world if we only went back to coining gold. But that is an imaginary past. That is what I am trying to correct, since stories color our understanding. Indeed, our understanding really boils down to stories—it is how we sort things out. Humans are born story tellers. All of them are false, of course.

OK: done for today. Thanks for comments and questions. Part two next week. That will get more into the nitty and the gritty.

Jackson Hole will be a Black Hole for Those Hoping for QE3

By Marshall Auerback and Rob Parenteau

Those leading the charge for “fiscal consolidation” now seem positively shocked by the violent gyrations in the stock market, as expectations rapidly seem to be shifting toward an “L” shaped recovery or worse – a possible global recession. To those of us on this blog who have consistently downplayed the prospects of global recovery in the midst of widespread private sector AND public sector retrenchment, none of this sadly comes as a surprise.  We are, as Bill Mitchell noted recently, experiencing a “self-inflicted catastrophe”, largely because of dangerously destructive myths in regard to the efficacy (or lack of it) in regard to fiscal policy.  But in spite of the shrill rhetoric of the fiscal austerian brigades, the markets are beginning to intuit that a nation cannot have a fiscal contraction expansion when all other spending is flat or going backwards and yet that remains the general trajectory of policy. 
To reiterate, today’s growing economic malaise is unsurprising to those of us who viewed the upturn in the global economy in the aftermath of the Lehman bankruptcy largely as a consequence of the coordinated fiscal expansion that was undertaken at that time, NOT the embrace of “quantitative easing” or other forms of monetary policy ‘stimulus’.  By the same token, it is equally easy to see the current accelerating downturn as a product of the premature withdrawal of said stimulus.  

No less than the new IMF head, Christine Lagarde, has recently counseled against letting fiscal brakes stall global recovery, even though the IMF has hitherto consistently been at the forefront of calling for more “fiscal consolidation.”  Indeed, it is manifestly clear that the governments which have drunk from this particularly glass of Kool-Aid most enthusiastically – Ireland, Greece, Latvia, Spain – are now seeing depression-like economic data.

Given prevailing political paralysis and the obstinate desire of politicians to make things worse as unemployment grows and riots continue to multiply on the streets (see the UK as Exhibit A), a number of commentators and policy makers have shifted focus back to monetary policy. One picks up this kind of chatter on Wall Street, where there exists a residual hope that somehow Big Ben will use this weekend’s Jackson Hole gathering to ring the bell for a form of QE3.
It’s hard to see why this should work out any better than QE2 or other variants of quantitative easing tried before.  (See herehere and here for fuller explanations.)  As Randy Wray has pointed out several times, “quantitative easing” is a slogan, not a policy.  During the entire period in which it was implemented, US GDP grew at a sluggish 1-1.5% (or thereabouts) and unemployment actually rose. 
Notwithstanding the evidence, hope still springs eternal in the financial markets, where there remains the perennial hope that the Fed will “do something.”  And, as market practioners we hear this sort of guff every single day.  There appears little doubt that Mr. Bernanke will try to throw more spaghetti at the wall, regardless of internal discord at the Fed or the external political heat. But we are at a loss as to which strand of spaghetti will actually stick in terms of a) capturing the imagination and confidence of investors enough to put the risk on trade back on for say another 4-6 quarters (or even 4-6 months), and/or b) driving US real GDP growth above trend for 2-3 years. Which makes us think unless there is some nuclear option we believe he is prepared to launch – like pegging S&P futures for 10%+ annual appreciation or something really out of the box like that – there is not much to be gained by trying to anticipate his next flinch.
We are at the point of watching the trout thrash around at the bottom of the boat, and I think part of the higher required risk premium we are in seeing in asset markets today is that the Fed Chairman is now understood to be no more powerful than the Wizard of Oz. And this is a very, very big safety blanket that is being ripped out of the hands of a whole generation of institutional investors (especially the long only guys). Part of the severity of the recent corrections has to do with the growing recognition that the prior fiscal and monetary policy approaches have been either exhausted or politically blocked, and so now it is up to the private marketplace and the invisible hand to do its magic.
Maybe an announcement of pegging the 10 year at 1% until real GDP has grown for above 3% for 1-2 years would do it – but we are already near 2%, and people seem to realize the interest rate sensitivity of economies is lower after balance sheet recessions. Maybe an open ended QE with a similar real GDP criteria would do it; but investors must be wondering why QE2 failed to keep equity prices on a permanently higher trajectory. 
Furthermore, they may have noticed that the ensuing commodity price inflation tends to trip up consumers who face slow job growth, low wage growth, and credit contraction.  If anything, QE2’s impact was antithetical to growth prospects to the extent that it encouraged additional speculative activity in the commodities complex, helping to generate additional price pressures in food and oil at a time when stressed consumers could ill-afford such rises.  More recently, thanks to investment, speculative and manipulative demands for oil, the Brent oil price has held up recently as the stock market has swooned.  So there is a risk that the introduction of a third round of quantitative easing could well re-establish these trends.
There is something of a precedent: the first half of 2008.  The global recession and credit crisis was underway.  Stock prices were falling.  Commodity prices including the price of oil should have fallen.  Instead, thanks to the above financial market demands, the oil price soared.  Without doubt that deepened the Great Recession. In the event that a new form of QE3 was introduced this weekend, that would represent is the worst of all possible worlds in terms of global growth prospects moving forward. At the very least, if the recent incipient perverse divergence in the Brent oil price and stock prices continues, the risk of a recession in the U.S. rises. 
Maybe the announcement that the Fed disagrees with the Treasury about the wisdom of an ever strengthening dollar, and will henceforth unilaterally intervene to produce a steady 10-20% depreciation per year until the real GDP criteria is hit, is enough to capture investor imaginations, but we suspect they would then begin to wonder about where beggar thy neighbor policies lead.
The fact that the markets are now calling for more monetary stimulus (even as most quail against any additional fiscal stimulus on the misguided grounds of “national insolvency” ) simply reflects the intellectual cul de sac at the heart of most mainstream economics, with its manifestation of the neo-liberal bias towards monetary policy over fiscal policy. What will motivate consumers to borrow if they are scared of losing their jobs? Why would a company borrow if they expect their sales to be depressed? The problem is a failure of demand which has to be addressed via demand measures – that is, fiscal policy.
We think investors are realizing that is a null set, and so whatever Mr. Bernanke announces will have a very short half life, a la pegging the 2 year. Now perhaps in regard to sentiment, technicals, and the extreme gyrations of recent weeks, we might well get some recovery in the equity markets.  But given the prevailing trajectory of policy, where we are debating tax rises versus government cuts (as opposed to the more economically productive debate of government spending versus tax CUTS), it’s hard to feel optimistic about global growth going forward.  The recent turbulence witnessed in the capital markets might be a foretaste of what Main Street is about to experience again.

Mark Steyn’s Ode to Criminogenic Environments

By William K. Black
(Cross-posted from

This column was prompted by listening to Mark Steyn (an ultra right writer) giving a C-SPAN talk on his new book that asserts that America has destroyed itself and will be superseded soon by China. Steyn is best known for his fear of a Muslim takeover of Europe. (During the C-SPAN talk he warned that the “Mullahs of Dearborn” had created “Michiganistan.” I grew up in Dearborn, Michigan, so perhaps I am agent of this dread conspiracy that has subjugated one of our states – and cleverly disguised its takeover by radical Islamic agents by electing conservative Republicans to run the state.)

Steyn’s contradictory concerns are that the United States government borrows too much money and spends too little on the military and too much on education. (He opines that university educations are a “waste” for “most” college students. Again, I may be an agent of this evil conspiracy to educate our kids.) He was a strong supporter of our recent invasions. He expressed his distress that the U.S. military was not leading the war in Libya. Under Steyn’s view of how financial systems work, those invasions were financed primarily by issuing large amounts of debt and were major contributors to what he terms a “debt catastrophe.” Indeed, he emphasizes his support for the massive amount of money that the U.S. spends on its military even when we are not a war – roughly the same amount as the rest of the world combined. He also claims that Western Europe is able to fund its generous social programs because they are “free riders” on the U.S. military. In other words, he argues that military spending limits U.S. growth and increases Treasury debt – and we should expand our spending and our invasions. His views are logically incoherent.

Steyn claims that he is most concerned about “wealth that is not yet created.” That is an excellent concern, one that competent economists stress. It is a concern that has virtually disappeared, however, in the context of the budget deficit games. We have roughly 25 million Americans that want to work full time but cannot do so because of the Great Recession. Their potential productivity is the quintessential example of “wealth that is not yet created” – the thing Steyn purports to find most distressing. Keeping twenty-five million Americans who want to work full time unemployed and underemployed constitutes the definition of “waste” and the gratuitous destruction of “wealth that has not yet created.” The waste and destruction of wealth are pointless – there is no benefit. The waste and damage are far broader than economic. Unemployment damages people, particularly adults, and communities. We can end all but a small residual of transitional unemployment any time we choose to do so. Doing so would shorten the Great Recession and greatly reduce its damage.

It is deficit hawks like Steyn, however, that keep us from creating the “wealth that is not yet created.” Steyn can’t understand that the primary reason that the deficit rose sharply was because of the Great Recession. Steyn is so unaware of economic theory that he wants the U.S. to adopt pro-cyclical policies that would have made the Great Recession far worse. He also thinks that governments with sovereign currencies are just like households when it comes to their debt. Worse, he thinks budget deficits are “moral” issues rather than financial issues. “It’s not a spending crisis, it’s a moral one.” “We are looting the future to bribe the present.”

There is a moral component to this crisis and “looting” is the key. George Akerlof and Paul Romer captured the component in the title of their famous 1993 article (“Looting: the Economic Underworld of Bankruptcy for Profit”). There are real looters out there, running many of our largest financial institutions. Their frauds hyper-inflated the financial bubble and drove the Great Recession. Running a deficit in a recession is not “looting.” Balancing a budget during a recession is insanely pro-cyclical. In 1937, when President Roosevelt made the grave mistake of listening to his conservative economic advisors and tried to balance the budget the policy through the U.S. back into the worst of the Great Depression.

Steyn is correct that the core of the real moral crisis is that we are “… absolving the citizenry for responsibility from their actions.” The citizens we are absolving are the perpetrators of the looting. The CEOs running the “control frauds” are not being prosecuted. They simultaneously caused catastrophic losses and profited enormously from their frauds (“bankruptcy for profit”). Steyn explicitly warns about the damage that elite frauds do to a nation, stressing “the fragility of civilization.” He claimed that the U.S. was about to become a Latin American nation entrenched in crony capitalism characterized by a wealthy, corrupt elite and vast numbers of the poor. He is correct that this crisis both represents and causes “the diversion of too much human capital into wasteful and self-indulgent activity.” The CEOs that run control frauds cause enormous, inefficient diversion of capital to the least productive investments and do so for the most self-indulgent reasons and in the most indulgent manner. They gloried in their toys, the private jets and many luxury cars. In a nation with a grave shortage of citizens with expertise in mathematics and the hard sciences we took many of our top graduates and made them financial “quants.” The quants, acting in accordance with the perverse financial incentives that the senior officers created, destroyed wealth. The full opportunity cost of diverting quantitative experts from science to aiding fraudulent finance includes the scientific research opportunities foregone. Steyn claims that college is a “waste” for “most” people who attend, but I’m one of the millions who are alive because of health research by university-trained scientists.

Steyn, however, is again a major part of the problem. He is notorious for his defense of the CEOs found guilty of running control frauds, i.e., his friend and fellow Canadian Conrad Black (no relation to me). Rather than holding these elite frauds accountable, Steyn is one of the leaders in the effort to allow them to loot with impunity. As Akerlof explained in his classic 1970 article on a market for “lemons,” fraud can create a “Gresham’s” dynamic in which markets become powerfully perverse. When frauds prosper, bad ethics drives good ethics from the marketplace. It is imperative that regulators serve as the regulatory “cops on the beat” to ensure that the frauds do not prosper and prevent economic catastrophe. Steyn is a virulent opponent of effective financial regulation. In his talk, he expressed no concern over the fraudulent elites extracting billions of dollars in wealth from creditors and shareholders. His rage was addressed to schoolteachers. Ignoring the trade-off they made between receiving lower salaries but superior pensions, Steyn focuses solely on the pensions received by public workers and claims that they are outrageous. He does not explain why his outrage is reserved for the little people, and only for the one portion of their compensation that is not sub-market.

The U.S. followed Steyn’s anti-regulatory policies for years, creating the criminogenic environment that produced our recurrent, intensifying financial crises. The three “de’s” – deregulation, desupervision, and de facto decriminalization – that led to the current crisis disappear in Steyn’s telling of the tale. Instead, he claims: “We see an unprecedented transfer of resources from the productive class to the obstructive class – to government, to regulators, to bureaucracies.” “We are redistributing liberty.” “Law has been supplanted by regulation.” Many of the regulators are “to the left of either party.” They U.S. is engaged in unprecedented, “hyper-regulatory direct rule….”

The reality is that the financial regulatory agencies, for decades, have been led overwhelmingly by conservative business people who are reflexively opposed to regulation. There are exceptions, but Steyn is correct that our financial policies are “rule[d] by a monopoly of ideas.” That monopoly is the opposite of the one Steyn fears – it is the neoclassical economics and modern finance idea that markets are efficient and automatically exclude fraud and that regulation is therefore unnecessary and harmful.

Steyn appears to assume, contrary to fact, that the CEOs of the financial firms are the “productive class.” He contrasts them to President Obama: “We entrusted a multi-trillion dollar enterprise to a guy who has never created a dime of wealth in his life and then we were surprised that for some reason it did not work out.” Let’s recall reality. We entrusted the U.S. government to President Bush. As a serial failure as an oil executive, our nation’s first MBA president destroyed wealth. He was repeatedly bailed out and ultimately made wealthy by political opportunists. As President, he destroyed staggering amounts of wealth and life. The CEOs of the nonprime lenders and investors destroyed massive amounts of wealth (roughly $10 trillion) – and were made personally wealthy because they did so.

But for the bailout by the U.S. government, the financial system would have collapsed. Steyn praised Americans as unique. Nearly all other Western nations experienced major protests demanding that the government take on the elite bankers, but in the U.S. the Tea Party protests were funded by the most conservative business factions and the protests demanded that the government adopt those factions’ anti-regulatory agenda. Steyn claimed that the Tea Party message was that they would be just fine if only the government were to do nothing in response to the crisis. That message is false as a matter of economics. Only the government was able to protect the Tea Party members from alling into a depression. Individuals cannot protect themselves effectively from a Great Depression or a Great Recession.

Steyn concluded his substantive argument with these words.
“I quote Milton Friedman: ‘don’t elect the right people to do the right things, create the conditions whereby the wrong people are forced to do the right things. There should be nothing controversial [about that statement].’”

What Steyn fails to understand is that Friedman’s point refutes Steyn’s anti-regulatory thesis. Friedman was simply making the fundamental point of economics – focus on the incentives and ensure that they are (1) powerful and (2) prevent perverse behavior. Control fraud both arises from and causes intense, perverse incentives. Fraud begets fraud. Accounting control frauds deliberately create perverse Gresham’s dynamic to spur fraud within their product line and create criminogenic environments that produce “echo” fraud epidemics in related fields. The CEOs of the lenders that specialized in making fraudulent nonprime loans, for example, used their ability to hire, fire, and compensate to create these perverse incentives among appraisers, loan brokers, loan officers, and credit rating agencies. Note that this allowed the fraudulent CEOs to suborn “controls” into their most valuable fraud allies and created deniability while making it more difficult to prove the CEO’s intent to defraud.

Once more, Steyn is a leading critic of the reforms that are essential under Steyn’s logic to prevent these crises. A Gresham’s dynamic can cause good people to do the wrong things. Vigorous financial regulators who serve as the regulatory “cops on the beat” are essential to the creation of the proper incentives so that the wrong CEOs are forced to do the right things.

Bill Black is the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.

Bill writes a column for Benzinga every Monday. His other academic articles, congressional testimony, and musings about the financial crisis can be found at his Social Science Research Network author page and at the blog New Economic Perspectives.

Today’s Modern Money Primer

Wray begins to dispel the view that coins used to be commodity money. Head over to the primer to read the latest in the MMP series: Commodity Money Coins? Metalism vs. Nominalism, Part 1