Daily Archives: August 24, 2011


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.