Knock-Knock.
Who’s there?
Money.
Anyone who writes about money (or for that matter debt or finance) knows what I’m about to say. Money scares the bejesus out of people.
Paul Krugman wrote about this in a recent post, entitled Monetary Rage, where he described the emotionally-charged reactions he gets from readers when he ventures into the dark underworld of money. As a young graduate student at MIT, Krugman was reportedly urged to avoid the money question at all costs (see here at 2:13), lest he be branded one of the unserious types. My colleague Randy Wray tells a story about the reaction he got from Robert Heilbroner when he asked Heilbroner to review his book Understanding Modern Money.
Let me go back to 1997 when I was finishing up my book titled Understanding Modern Money and I sent the manuscript to Robert Heilbroner to see if he’d write a blurb for the jacket. He called me immediately to tell me he could not do it.
As nicely as he could, he said (in the most soothing voice), “Your book is about money—the most terrifying topic there is. And this book is going to scare the hell out of everybody.”
I had a similar experience in a graduate macroeconomics class at Cambridge University. Willem Buiter was busy lecturing on IS-LM theory, when I raised my hand and asked something about endogenous money (a question I’ll admit was designed to challenge the underlying assumptions (loanable funds) in his model). I’ll never forget his response. He said:
If you are the type of person who thinks money is important, you’re probably the same type of person who would enjoy sitting in your basement and beating yourself with a rubber hose.
I obviously touched a nerve. The same kind of nerve Krugman occasionally touches and Heilbroner knew Randy would touch. Just what is it about money that tends to evoke such a visceral reaction in people?
According to Krugman, it’s part political and part emotional. For more insight, we could ask Business Insider’s Joe Weisenthal, who has become the target of an intense campaign to stop the Secretary of the U.S. Treasury from striking a $1 trillion coin and depositing into its account at the Federal Reserve. Joe simply wanted to point out that there is an alternative to defaulting on the public debt that does not involve the 14th Amendment or the Supreme Court. If he wanted to, Timothy Geithner could exercise his legal authority to do this:
Or this:
A lot of people are hung up on the face value of the coin. Some want it smaller. (Perhaps they suffer from meganumaphobia.) Others want it much bigger. And many really, really, really don’t want it at all, even if it means enduring the catastrophic effects of a voluntary default on our nation’s debt.
Krugman discusses this in his most recent post, Rage Against the Coin. Some say it would sink the dollar. Others (hilariously) say it would sink a ship!
The best way to track the rage is by following the hash tag #MintTheCoin on Twitter. It offers great insight into the nature of the fear that so many people have about money, debt and finance.
In spite of the rage the #MintTheCoin movement reveals, I think Ryan Cooper has it right.
So true. Love the “Fake Money” vs “Real Money” tweet. Classic… as in Gross Misunderstanding! If keystrokes are real, then the coin is no less so. Keep chippin’ away… the apparently insurmountable monolith has feet of clay!
The government must have a vault somewhere where it keeps all the Real Money. The money in that vault is not made out of paper or metal. It’s made out of pure moneytanium.
Moneytanium 😉
Or Promisorium.
All modern money is in fact made up of promissory notes: Federal Reserve Notes, US Treasury notes, cheques, and now the trillion dollar platinum coin would also be a promissory note, with nothing to back it up other than more money created out of thin air.
Or Promiscutium!
Did you mean promiscuitum?
A vital distinction that; but as a transuranic substance with an atomic number in the trillions I believe the periodic table form (e.g uranium), rather than the Latin form, is the correct one.
Haha good stuff, I like the second to last “tweet” by Andrea Silver.. doesn’t make a bit of sense but I feel like it might still be true somehow.
I blame the stupidity of the (orthodox) economics profession for this, they teach and think about money all wrong and it does trickle down to the masses. I remember also believing that the government borrows our money, and this leaves us with less. Oh well, I was stupid, what can i say? But professionals have no excuse to be so stupid.
One way to overcome phobias is to approach them is small incremental steps that can be “handled” by the individual. That approach might work for at least some of the above bloggers. That’s why I offered the alternative of starting with a $1000 platinum coin, then progressing quickly to a $1,000,000 coin, a$1B coin and then the trillion dollar platinum coin in sufficient numbers to accomplish MMT aims.
I don’t think it is money per se that scares them, it is the thought of government creating so much money that it becomes worthless. Without constraints, government tends always to excess. See Hitler, Stalin, any 3rd-world dictator. Or never mind those extremes, see the treatment of Japanese-Americans in WWII, or just the constant maneuvering of any US politician to expand his own power while trying to seem as if he is not violating the constraints, the Constitution.
All the rest of macroeconomics is just so much academic theory to most people. Money is something they deal with and depend on.
Bingo!
This is because they do not grasp how money is created despite the process being remarkably simple.
As you can see here, there are differing opinions about how money is created. Taking the MMT view, it is created by government (deficit) spending. That is what is under attack now by those who fear creation of too much money. That would seem to say that their understanding is pretty much accurate, though possibly not “in paradigm”.
Money is created indirectly by government spending. It is the Federal Reserve who actually create the money out of thin air as debt. Why not allow the US Treasury to perform this conjuring trick.
Hey Presto, and money comes into being. Inflation is not dependent on who creates the money, but by the amount created. Too much we have inflation, too little and we have deflation. Modest inflation is necessary for an expanding economy.
frank
A modestly expanding national economy needs a modestly expanding supply of money.
Issuing the useful amount of money prevents both inflation and deflation.
Here is a link to the 1939 Program for Monetary Reform, a publication by six of the most prominent monetary economists of their generation, including Irving Fisher, Paul Douglas and Frank Graham.
http://www.economicstability.org/history/a-program-for-monetary-reform-the-1939-document
This important document was publicly supported by over 400 economists at the time when economists understood money, and stood for something.
The stated intention of the authors was ‘ to put an end to the lawless variability of the nation’s money supply’, and they proposed a rule-of-law on accommodative monetary expansion – a true scientific metric that far exceeds anything ever postulated by any advocate of the modern theory of money.
It is written in easily understandable 101 economic terms.
Please do.
Thanks.
If I’m following correctly, this is a call to eliminate fractional reserve banking, the rationale given being grounded in a tacit assumption of the quantity theory of money.
* What has been our experience since 1939? Have any large, modern capitalist economies imposed a 100% reserve requirement? If so, has it worked out?
My guess would be that it hasn’t been tried, but that as a matter of theory, it would be entirely impractical. Maybe I’m missing something, but I think what the paper suggests would mean that all forms of high-liquidity money would be unavailable for loans or investments—the same as keeping that money as cash. Wouldn’t that bring our modern economic system pretty much to a halt?
* Intuitively, the quantity theory of money doesn’t sound right. Money is not just like, or even much like, any other commodity. Perhaps it was generally accepted in 1939; but are there not, at present, many economists who seriously doubt, or outright reject, the quantity theory of money?
Frank,
Thanks for an obvious effort to comprehend the ideas behind the 1939 Program.
First, regarding the Quantity Theory – much of the modern discussion stems from the work of Irving Fisher, a co-author of this 1939 paper. See his 1911 publication: “On the Purchasing Power of Money”.
“Maybe I’m missing something, but I think what the paper suggests would mean that all forms of high-liquidity money would be unavailable for loans or investments—the same as keeping that money as cash. Wouldn’t that bring our modern economic system pretty much to a halt?”
Thanks for asking that as a question. The paper first proposes a monetization of bank credit by the monetary authority. As a result, checking account balances would be backed by ‘reserves’ just as all savings accounts are now – by definition as 100 Percent Money. At that point, checking account balances would not receive interest. People wanting to receive interest on deposit balances would move their money from a demand account to a savings account from which it could be lent.
So, if by high-liquidity money you mean demand deposits, then, yes, they could not be lent. And if by “our modern economic system” you mean highly-leveraged speculation in excessive financialization, then yes this could be brought to a halt.
There being adequate money for achieving GDP potential, banks would simply resort to financial intermediation, just as people think they do today. The privilege of creating the nation’s money is removed from the private bankers, and rests with government – just as MMT claims they have today..
Section (13) of the paper “Lending Under the 100 Percent reserve System” certainly suggests more than adequate money for lending. And I remind of the six noted monetary economist authors and public support of over 400 economists.
The paper makes the case why lending would not be curtailed, and one of its primary authors also wrote “The Debt Deflation Theory of Great Depressions”, so the suggestion about recessionary effects should be well measured before coming to any conclusions.
In addition, noted Japanese economist Dr. Kaoru Yamaguchi using modern systems dynamics modeling showed that resort to either a full-reserve, or to a real-money (no reserve), monetary system would have beneficial effects on economic growth without either inflation or deflation.
http://monetary.org/wp-content/uploads/2011/11/DesignOpenMacro.pdf
The same results were found by IMF researchers Benes and Kumhof in their recent paper on “The Chicago Plan Revisited”, which goes much further than the proposal of the 1939 Program.
Finally, as for some theoretical relationship between 100 Percent Money and any commodity, the opposite should be obviously at play. From where would you gain that idea?
Thanks.
it is the thought of government creating so much money that it becomes worthless. Without constraints, government tends always to excess. golfer1john
If the banks create 97% of the money supply then it is likely they create most of the price inflation too. So why are people more concerned with government money creation than bank credit creation?
“If the banks create 97% of the money supply”
Source?
From Ellen Brown if I recall.
Beard.
In England, the banks create/issue 97 percent of the money.
In the US , banks issue all the money, coins excepted, 99+ Percent.
That’s why there’s a 99 percent revolution.
For proof, look at the money metrics and see who issued that money.
It’s time to have a money system for the 100 percent.
.
Many reasons.
People believe there are constraints on bank credit creation. They think banks will not lend unless they think they will be paid back, and/or the borrower puts up sufficient collateral to indemnify the bank if he defaults.
(Wasn’t always true, recently, but people think that is an aberration, and something that government regulation of banks should have prevented.) And they think most people will not borrow unless they think they will be able to pay back the loan, either from their income or from the additional income they will be able to generate because of the loan. And banks will know not to lend to the others. Thus banks will not create money without limit, only so much money as is helpful to the economy.
I think people mostly believe also that banks can only make loans out of their deposits, which are limited. As I understand it, some economists believe this as well.
OTOH, people see government as operationally unlimited, just as MMT says. It can create money without limit, and when they see what has happened to the Fed’s balance sheet lately, they see it doing so.
Think of the bathtub analogy, with two faucets. One faucet brings in 97% of the drain capacity, the other 3%. The bathtub can stay full, and in equilibrium forever. If the 3% faucet increases to 4%, the bathtub will overflow. People see the 97% faucet as well-controlled, and the other as questionably controlled.
John, I generally agree with you, but your bathroom analogy is problematic.
It appears to me that the imagined big faucet (bank loans) cannot bring in any fraction of the drain capacity (taxation). We the private sector in the aggregate just can’t pay our taxes or build net financial savings from bank loans. Funds for those have to come from the imagined small faucet (government spending). Even when we include the lending banks with the private sector (which they are), the whole economic activity that their lending may create, which people apparently find wholesome and good and better, serves to cause net aggregate private sector loss thanks to income and other federal taxes that become due during the exercise.
Oops, that was supposed to read ‘bathtub analogy.’
You’re stretching the analogy too far, or perhaps thinking of a different analogy.
Think of the drain as a constant demand for money, and the faucets as supply. The question is which faucet is dangerous, the large one or the uncontrolled one?
I should have used a lake, instead, because others have used the bathtub to describe the phenomena you’re thinking of.
Perhaps. I guess, associating drain with demand for money doesn’t resonate with me. But that’s just me.
I think the lake visual has already been employed by Grover Norquist, taxing the wealthy to pay for XYZ being akin to taking a bucket of water from one side then dumping it back into the lake on the other side. How about a swimming pool? 🙂
So unfortunate people have been programmed to deny anything economic that is based on knowledge instead of outdated belief. #MintTheCoin !!!
I’m so broke it just doesn’t make cents.
It’s about inflation you know or maybe just that the looney liberals will spend it all. Or maybe Obama has something else in mind? Something like that anyway.
Terrific blog post Dr. Kelton. I’ll have more to say once I finish my full comment write-up by tomorrow.
Well it IS about inflation. Embrace people when they make this objection because at least they have accepted that we can MAKE money with keystrokes.
Then engage in a debate about whether it is inflationary in the short term, whether having this extra money will lead congress to spend too much, and then a conversation about how to control inflation while maintaining optal productivity and growth.
It is true, most people don’t understand how things really work, but they probably are starting to get some idea of how corrupt things have become. It isn’t entirely irrational for people to fear what would happen if this corrupt system starting exercising the power to create unconstrained amounts of money.
I guess they haven’t paid much attention to the Fed’s QE antics.
It isn’t entirely irrational for people to fear what would happen if this corrupt system starting exercising the power to create unconstrained amounts of money. But “this corrupt system” is already “exercising the power to create unconstrained amounts of money”. For corrupt purposes.
The objections are always to creating comparatively small amounts of money for obviously sane and useful purposes. The purposes that the corruption is but a parasite on, that keep the whole thing going.
I just wonder how it would play out, if MMT was actually embraced by the current crop of crony-capitalists. Would the parasites strangle the host any less than they are doing now?
I don’t see why full employment, with an MMT-style JG and MMT-inspired budget policy would restrain crony capitalism at all. The host would fell less pain, though.
Government has a responsibility to police the criminals. The degeneration of law enforcement began in relatively good times, and has continued during the recession, so the state of the economy would seem not to matter.
You can lay off police when criminal activity is low. It’s when it becomes high that you need to hire more. Hiring more financial regulator police would seem to be a good use for some of the stimulus money that MMT would create. Wouldn’t even cause much of a strain on the environment
You could do that, but you could do it now, too, without MMT.
Could and should. The problem is getting Congress to appropriate some new or shift some old funds for the task. The TDC at least overcomes the funding obstacle.
My point is, that MMT is “actually embraced by the current crop of crony-capitalists” RIGHT NOW. No speculation necessary, just observation.
The JG just asks – why do only those guys get to be Uncle Sam’s cronies? Why can’t I be one too? This would be inflationary, so Uncle Sam says – OK just do this errand for me & you are my crony – I’ll give you some dollars. In the slightly longer run, all the new cronies might ask: “Hey, Uncle Sam. Why don’t you ask the old cronies to uhhh, do something for you for the billions they get from you, like we do for a living, but not munificent, wage?” A JG is the old cronies’ worst nightmare. Once the USA gets one, the smart ones will know it’s time to take the next flight out to Rio.
Nice post Stephanie. My attempt to bring up endogenous money during a discussion of IS-LM this past semester was largely dismissed, which I guess is better than the response you received. Although the road of studying money in economics may be rough, it’s nice to know/see others such as yourself and Randy successfully pursuing the topic and making headway in larger debates.
The Economist has a nice piece on the Coin that brings up IS-LM. That should get some traction I suppose.
http://www.economist.com/blogs/freeexchange/2013/01/economics-platinum-coin-option
Hi. Why use the term “endogenous money” to challenge loanable funds?
Because loanable funds doctrine assumes that banks only lend out a percentage of their deposits. Endogenous money theory (and actual reality) state that banks are unconstrained by their deposit base, since they can always borrow from the Fed Funds market to meet reserve requirements. The Fed Funds rate is set by the Federal Reserve through its open market activities. This means that banks can always “create money” by borrowing short and lending long, with the Fed stepping in to make sure that there’s always enough money in the system so that the rates the banks pay for borrowing don’t get too high. Basically, banks can lend as much as they like and the Fed will make sure that theres enough money in the system ex post.
In reality, the LM curve is flat (correct me, someone if I’m wrong…I only got schooled in neo-classical), since the Fed sets the interest rate, not the amount of savings people are doing.
All this drama is good. It means that the popular conception of money is stretched to the breaking point, especially in the pundit/media/chattering/wonk classes.
SK, to answer your question in one word: Ignorance
People just don’t understand. if you watch cnbc or any other tv news, they just repeat and reinforce the same old fallacies because understanding the details is tough for smart people, near impossible for average people, plus the details are rather boring when compared to an a.d.d. society that thrives on sensationalized headlines only.
watching cnbc this morning, they had some authoritative guy on and here was the quote when asked “what’s the real problem in the economy” to which he responds “we just produce too much stuff”.
i can’t explain how painful it is to watch a mainstream tv news program talk about the economic issues after learning so much on this website.
the list of article writters on the right side of the page collectively have the real solutions to the problems. i don’t know why congress doesn’t catch on. i keep hoping for a breakthrough!…:-)
You talk as if the $ is a national currency.
It ain’t.
“Growth” in the US will extract resources from somewhere else.
When Lincoln did that Greenback thingy he turned domestic US coal into a monetary token.(nothing wrong with that )
But despite the energy independence spin real growth in the US will drag in energy from elsewhere.
Why not keep the coin on the treasury books alone
Keep the Fed out of the equation
Why must it be double entry stuff ?
It can be just money and not credit.
Because the Fed would pay the interest on the coin?
Double-entry think-speak.
Before you can learn about money, you must learn about accounting.
It’s how they legalized the crime of banking. (Silas Adams)
Without it, fractional-reserve bankers would be jailed.
But they own the jailers.
Oh well.
National Economy in Balance Sheet Recession.
Fractional Reserve Banking doesn’t work in reverse.
ZIRP.
Disgustingly excessive reserve issuance.
Private sector debt saturation.
That’s why Minsky called for a new National Monetary Commission.
Why aren’t we talking about that?
agreed
I believe the reason the coin needs to go to the Fed is that it needs to be “cashed” into electronic units in order to be transferred to agency accounts. Since Congress has limited the quantities of other coins that the mint can issue, and coins are not easily moved from one account to another, the TDC needs to be broken down into key stroke units to be easily moved between accounts. I don’t believe the Treasury can just deposit a TDC into the TGA directly by key stroke, but if it can, then the Fed is not needed. BTW, if the TDC is held by the Fed, it would not be paying interest on it to the Tsy. just as no interest is paid on cash held in a bank vault.
if the TDC is held by the Fed, it would not be paying interest on it to the Tsy. just as no interest is paid on cash held in a bank vault.
But the Fed would pay interest on reserves created by spending from the newfound $1T in the TGA.
It’s true that the Fed is paying interest on reserves now (is it .25 or .5 %?), but only part of the TDC would create new reserves, the rest would or could retire old Treasury notes earning higher interest. I understand that the loss of these higher interest government securities is one reason banks are opposed to issuing the TDC.
Yeah, you’ve gotta point there. I guess, the idea of using the coinage gains to retire existing obligations just don’t resonate with me. Asking rhetorically, why not just spend from it?
Presumably the Fed is maintaining a balance at its chosen interest rate, so Treasury purchases (or failure to roll over) of lots of T-securities would upset that and have to be offset. The issue of how to use the TDC does highlight the differentiation of monetary and fiscal policy, though. In real life, Treasury should coordinate with the Fed so as not to make their life more difficult.
That sounds like the effect of using the coinage gains to retire debt? Asking just so I am not further confused; I am nowhere near being on top of tsy-fed-mkt operations. I only have a vague sense of the fed’s objective to control interest rates by the so-called FFR (=IOR?), and therefore, of the downside of excess reserves in the system. Having too much of it in a short time (from retiring debt or spending) is perhaps particularly problematic…
… but I don’t think I have a proper appreciation of monetary policy or the fed’s interest rate control objective. What if it falls to 0%?
Whether they buy up existing bonds, or simply fail to sell new ones, the effect is the same. If the interest rate falls to 0, the Fed would sell bonds, driving the price down and the interest rate up to their target rate. Many bond-holders don’t have access to IOR or FFR, so they might drive the price of bonds up, and the rate down, to below the Fed’s target. The Fed has a finite supply of bonds, so if the Treasury were to become a net buyer, and the Fed ran out, they might lose control of the interest rate.
Mosler has written a lot about operations.
Retiring an old Treasury note adds reserves, too. It doesn’t change non-government NFA, though.
If government caused inflation is the bogeyman why start out by adding interest to government funding?
I think it’s more about the genuineness of what they are now calling money.or lack of value that causes fear.
Obamas new coin
http://youtu.be/wng-eSUk9I0
Excellent post. NEP’s fact-based focus on the mechanics of monetary operations continues to erode the mystery surrounding money. Still a long way to go with educating the masses probably, but if this continues people may realize there is more to existence than just maximizing the economic (monetary) return on capital. There is much greater virtue and value to be achieved in maximizing that return by including non-exploited human and environmental factors in the calculus too. With only the single-minded focus on economic (money) returns, our commerce is unbalanced like a one legged stool; however, it requires a minimum of three legs for balance. We need sustainable (social, environmental, and economic) capital return and goals, not crony-based monetary ones only!
Available.
See Soddy’s : The Role of Money.
Thanks.
I worked in the Ferrari business on the east coast and later on the west coast. The west coast guys had money from Silcone Valley, but the east coast guys had “real money”, from old families. But the west coast guys could still afford just as many Ferraris as the east coasters. Turns out Modena doesn’t give a shit whether your money is “real” or not. And if it’s good enough for Ferrari, it’s good enough for me.
Dr. Kelton,
Can you explain how money acquires and maintains its value? Can you do it in 1000 words or less, such that a person of average intelligence with a typical high school education can understand it well enough to draw simple, accurate conclusions from that understanding?
If you can, I think you would do us all a great service to write it down (if you haven’t already).
If you can’t (my hunch is that it is not possible), you should understand why the topic is so scary. We are all dependent on money for the quality of our lives, even for survival itself; yet almost none of us really understand it. We take money on faith—and the path from faith to reason is, if anything, more difficult in the social sciences than in the natural ones. Threatening to expose the mythical nature of people’s intuitive model for money meets with the same reactions as any attempt to undermine their working concepts of the gods.
I think the problem is that people just don’t “get” that money is not wealth. They are simply not taught this basic fact, and as a result think that money is wealth and panic at the very idea that it isn’t, and that we can control it rather than letting it control us.
If they understood this simple distinction they would then be able to understand that money, like all other units of measurement, is simply a number. No one worries about running out of inches, after all!
Yet the very idea would strike people as ludicrous, for they cannot see that the same thing applies to money. Just as inches are “defined”, and not existent apart from their definition, money is also “defined” and exists only in the same way that inches exist.
As a measurement of wealth “money” is created out of “nothing” just as inches are. We do not have to go out and find a supply of inches to paint them on a ruler, and we do not have to go out and find a supply of money to print coins and bills signifying a certain measurement of wealth.
It is just as silly to think of an economy running out of money as it would be to think of it running out of inches.
But our attitudes toward money are based on “common sense” ideas that are not applicable to the reality, yet hold a strong emotional sway over most people. We are still clinging to the commonsense Newtonian “world as mechanism” perception of the 18th century long after it has been superseded by quantum physics.
Don’t loose heart with people. Don’t underestimate them. Just ask them to imagine that, from now on, they are required to pay their taxes with inches painted on government-issued rulers.
I think your average intelligent fifteen year old has tumbled to the fact that a $10 bill is inherently worthless.
“I think your average intelligent fifteen year old has tumbled to the fact that a $10 bill is inherently worthless.”
Perhaps. I suspect that most people actually don’t, and this seems to be supported by the responses most people give when I talk to them about it. Of course that is a small and biased sample. Still most of those I talk to have simply never thought much about it and they seem to assume that somehow the dollar has value because it is inherently valuable. Of course the folks I talk to aren’t bankers or economists but fairly normal working people.
A lot of fairly normal working people are hoarding gold or silver, because they “know” that the dollar will be recognized as worthless, eventually. They see their dollars gradually losing value over time, and while gold fluctuates, it has been a big winner recently. Even those not doing so tend to think of gold as “real” money, as opposed to dollars. Maybe in the back of their mind they recognize that the idea of the dollar having value only because everyone accepts it is not really a valid concept.
Spot.On.
@Coises: “Can you explain how money acquires and maintains its value?
If you can, I think you would do us all a great service to write it down (if you haven’t already).”
This has already been dealt with many times on this forum and others. In a nutshell, fiat money is given value by the fact that (a) The government has the sovereign authority to allow only it’s fiat money to be used as a common medium exchange, and that (b) because of this, the government requires that taxes may only be paid in that medium. This is known as “chartalism”, and you can look it up on Wikepedia if you want more detail. Since you can only pay your taxes in the USA in US dollars, you must therefore acquire US dollars for that purpose at least. To do that you must trade something of real value for those dollars, as must everyone else in the economy. Thus the dollar gains it’s value.
OK… then, the first inference I would draw from that is that money must become more valuable when the government demands more in taxes, and less valuable when it demands less (since the implication is that if the government demanded no taxes, the value of money would fall to zero). There must be at least one other relevant factor, though, or the units don’t work out: the question is about value in relation to nominal dollars, and taxes are denominated in nominal dollars only. I think the purchasing power of $1 at some agreed-upon point in time could serve as a reference for “real value”; but what connects the government’s demand for taxes to the (current) real value of a dollar?
(Remember the question—or challenge, if you will—that I posed. I’m looking for a reasonable explanation that can be understood and applied by a person without any specific background in economics: something that has the potential to replace the common, faith-based understanding of “the value of money”… the one that makes people react to the platinum coin idea as a pious believer reacts to blasphemy. I’ve said that my hunch is that it can’t be done; but I am much too low on the learning curve to state that as a fact, and I’d love to be shown that I’m wrong, because such an explanation would be a great first step in cutting through some of the nonsense that paralyzes our policy mechanisms.)
Coises, I agree that it’s important to tackle this, the major source of MMT skepticism. I hope Prof. Kelton has a reponse. If she doesn’t, maybe this is the best that can be done.
1. US dollars are created mainly by the Fed and commercial banks; the latter to whatever extent they choose to create loans. No one (not Congress, not the President, not even the Fed) directly limits the gross amount of US dollars in circulation.
2. Is this inflationary? Sure it can be. Where do you think the housing bubble came from? (Hint: who made lots of money that they still have — even after going bust — because the Feds bailed ’em out from the consequences of their own greed and short-sightedness?)
3. Pretty solid economic history gives us a good handle on how and when generalized inflation occurs: when there’s more money in circulation than productive capacity to absorb it. Generalized inflation is no threat when unemployment is high and plant utilization is well below 100%. (Of course, you can still have price rises in particular goods due to real restrictions in supply or rises in input costs.) And when the money supply DOES approach an inflationary inflection point, appropriately-calibrated tax increases and public expenditure cuts can counter it.
4. So, given this, who would you rather have controlling the money supply? A bunch of myopically self-serving bankers who history shows run a boom-and-bust bubble economy designed expressly to fleece everyone else? Or a sold-out US Congress? Tough choice, I agree. But which one can ultimately be held responsible for the results of their decisions upon PUBLIC interest?
We know beyond any doubt the current US economic model fails to provide price stability reliably preserve the value of its citizens’ savings over the long run. Even though I’m a retiree living on income from savings, investment, and Social Security, I’m convinced it’s time to try something that seems to have a decent chance of doing better.
The “other relevant factor” you talk about is simply the market. People start using the dollar to trade because they have to obtain it to pay taxes. It is then inefficient to use another tool for the rest of their trades so they use the dollar for them, too (if the government supplies enough dollars for this purpose). And the market, that is the combination of all the trades in the economy, along with the amount of money supplied by the government then determines the “value” of the dollar. MMT is not the least iminicable to markets. It is a viewpoint that allows society to use markets efficiently to serve the interests of that society.
It may be approaching 1000 words, but there are many instances of explanations around here about how and why money has value at all, based on taxation. It’s not, as the alternate explanation says, just because people are willing to accept it: that is a circular argument that does not get to the root cause. And you understand that, I think, and you are right that when taxes are higher demand for money would go up (assuming, of course, a constant supply). This is why the resolution of the fiscal cliff, the tax increase, will reduce private sector spending and take 1.5% or so off of GDP this year.
The value of money in terms of other goods and services works just like anything else, according to the laws of supply and demand. There are problems of measurement, because money relates uniquely and individually to every other thing that it buys. How would you know the value of a car, if you could use it to buy wheat, or a surgical procedure, or college tuition? Today one car could buy one surgery, or one year of college, or 1000 bushels of wheat. In a year the car might be worth 0.9 surgeries, 0.8 years of college, and 1200 bushels of wheat. Has the value of the car changed, or has the change been in the value of the other things? Who can say?
Statisticians compile the CPI, but they unfortunately also compile lots of other price indices, and they don’t agree with each other. Which one truly measures the value of the dollar? Dollars are traded against other currencies, but sometimes it goes up against the Euro and down against the Yen. Which one measures the value of the dollar?
Perhaps the one thing that does have constant value is time. Ultimately, the value of the dollar can be expressed in terms of how much of a person’s time it can buy. Or, more generally, the cost of unskilled labor in a relatively unconstrained market. This is why the MMT Job Guarantee is such an effective price anchor.
As for the TDC conflict, the understanding that is lacking is that it isn’t money until it is spent. Consider the debt ceiling issue itself. Government can’t borrow any more, once it is reached. So they can’t spend any more either. But, by a mere vote in Congress, the power to borrow and spend can be restored. Out of THIN AIR!! It’s a miracle!! But everyone understands that it is not the raising of the debt ceiling that matters, it is the spending. Suppose we need to spend another $120B this month. We could raise the debt ceiling by $120B and spend $120B, or we could raise the debt ceiling by $2T and spend $120B (which is what will probably happen), or we could mint a $120B coin and spend it, or we could mint a $60T coin and spend $120B. The effect on the economy is no different.
The “faith-based” objection to the TDC is based in economics, in understanding of the laws of supply and demand. The TDC enables government to greatly expand supply, and if they were to do so, say by trying to spend the $60T all at once, it would cause inflation. If the difference between having the coin and spending it is not recognized, then the objection is to the coin itself rather than the spending.
This is separate from the idea that we need a bigger deficit right now to combat high unemployment, and that such a policy cannot be inflationary as long as unemployment remains high.
Thanks GJ. Very clear and relevant exposition.
Brava, Dr. K! It is hard to imagine, but you, and NEP and Joe Firestone have raised the TDC from econo-speak fantasyland to mainline political/economic conversation. A huge accomplishment! You and the MMT gang could spend years working to move MMT into mainline macroeconomics. Here, in one fell swoop, with a true potential crisis looming, the idea of a Trillion Dollar Coin is blasted onto the scene, makes it by the first line of gatekeeper defense, and, with your help, enters the broad blogosphere and MSM domain, where the public, who could care a fig about macroeconomics, is suddenly captivated, enchanted, infuriated, intrigued. Could it work? Is it legal? What does it mean?
It’s kind of like when Jesus decided to stop telling the Truth straight out, and shifted to parables. Only the serious students remember details of the Sermon on the Mount, but everyone knows the story of the Prodigal Son. In 60 days time, everyone may know the newest parable, that of the Trillion Dollar Coin that slayed the Debt Ceiling Dragon!
The idea of the TDC is so new, so unheard of, so never-before-discussed that you get Paul Krugman and James Pethokoukis of AEI on the same page. Amazing!
What is equally amazing is that few of the non-MMT pundits have looked “underneath” the TDC, at its broad implications for fiscal and monetary economic policy. And the implications are huge:
1. If we can do a $1Trillion coin, how about $10Trillion or $60Trillion?
2. And if we could do that, then we would never need to increase the National Debt, and the deficits we incur now to help people have food, and healthcare, and, possibly, jobs, then we wouldn’t be irresponsibly burdening our kids, the future generations with debts they can’t possibly repay.
3. And wouldn’t that mean that we could pay off the entire national debt if we wanted to?
4. And wouldn’t that mean that the Chinese don’t really own us after all?
5. And wouldn’t all of this mean that this country isn’t broke and never will be?
6. And when the necessary conversation about inflation is engaged, more people might see that inflation will not be caused by printing money, when there is so much slack in the real economy; that the Fed has and is demonstrating this by printing money for QE 1/2/3 without inflationary effects; and if the conversation continues, that the Fed doesn’t really control the broad money supply (Mr. Buiter’s hated “endogenous money”), and that just as there is no Government Budget Constraint, there is no fixed supply of loanable funds, that banks create M1/M2 by making loans to creditworthy customers, and that loans/deposits/M1 growth comes first and reserves follow.
I could go on, but will stop here. Now, for a moment, shift to the politics: Tell me what in the world Republicans have left if we take away the fear of economic scarcity, of budget crisis, of the absolutely crystal clear economic need to totally change Medicare/Medicaid/Social Security, because they are unaffordable. These ideas render the GOP obsolete.
Is it possible the TDC could be a paradigm shifting game changer?
If so, Dr. K, be ready. Elephants don’t go quietly!
Here’s my armchair psychologist take on it. (btw, I’m currently reading Graeber’s Debt: The First 5,000 Years, which is where the following analysis comes, partially, from)
Money represents, on a very deep level, social obligation and relationship; that which I owe to others and that which others owe to me. While different societies have very different systems of social obligation, within the context of any given society the social obligations of that society seem natural and apparent. Just as it seems only natural to us that a wealthy person should be allowed to keep their wealth to themselves, so too, to the Northwest Indians did it seem only natural that a wealthy person should give their wealth away. Our ideas about social obligation largely make our society what it is, and money is intimitely tied to our ideas of obligation. Because of this, any change in the money system is felt to be an attack upon the recieved system of social obligations, which is to say, upon society itself.
The way this gets expressed practically is through fears of inflation, fears that the money I have earned and saved will be devalued. This is not only a devaluation of currency, however, but an adjustment of social obligations. If the money I earn represents society’s obligation to me, then devaluing that money means that I both owe society more (I’ll have to work harder to make ends meet) and that society owes me less (since the money-obligations I have already accumulated have lost value).
These reactions are understandable. Money plays a large part in most people’s lives, and any suggestion that it can be arbitrarily manipulated is understandably upsetting. Unfortunately, what the tweeters you highlight don’t understand is that the money system is already being manipulated by and for large financial interests (mainly). I think continued public education is the only solution. Keep blogging, keep speaking to whoever will listen, keep teaching, just keep on in general.
Macroeconomics is highly counterintuitive to most people, and it doesn’t help that most economists don’t have a very good handle on it either. It’s kind of amazing to me that these issues are even getting discussed on as wide a stage as they are. Who knows, reason and truth may win out yet.
Very well put!
thanks!
Consider one penny invested at the time of Christ, invested at 1% compound interest, and then explain why there is not enough money now in existence to pay it back.
Money not only facilitates trade, it has become another commodity to be traded against real estate, stock, commodity and bond markets. There is so much of it sloshing around the world at light speed that interest rates are now low. They could go negative as they did in Switzerland some years ago. They are already negative in fact, because the rate of inflation exceeds the interest rate on bank savings accounts.
$0.01 * (1.01^2013) = $499,948,678.15
There is far more than that much money in existence.
The answer to Stephenie’s question is easy. There are large numbers of very simple people out there (Austrians in particular) who have tumbled to the fact that excess money printing can lead to inflation. They think that is some sort of big insight, which no one else has fathomed. Those simpletons find it necessary to constantly tell the world about their amazing insight.
Good one Ralph, you hit the nail on the head.
Once you understand that as sovereign issuer ( and user ) of the US currency the government is a bank together with the true uses of taxation and bonds it becomes logical to use the expedient of issuing a Platinum Coin to defeat the ignorance and blackmailing attempt of the Republican Party. At some politically realistic point it will become possible to pass legislation that fully recognizes the role of the US government as a special kind of bank contributing alongside the private banks to the National Credit.
I’m not sure where this quote comes from – maybe it was Joan Robinson, but someone once said “economics is when people wonder why they have no money”.
@Coises
I think the regulars here should treat your comment as an invitation to a short-essay contest. Here’s my entry:
A dollar is to a dollar bill as a yardstick is to a yard. Three feet make a yard, whether the stick is present or not. One hundred cents add up to a dollar, whether it is represented by a note, a coin or just a little swarm of electrons glowing in some cell of some spreadsheet on the computer of some bank. A dollar is real in the same way a yard is real – it’s a unit. It measures something. The yard measures distance. The dollar measures value. The yard is a fixed, constant quantity (though not near the speed of light!) The dollar, of course, measures something much more variable.
But it does not vary randomly or arbitrarily. And the very manner and means of its variation contribute to this conclusion – because the dollar and other dollar-denominated financial assets trade on the most liquid, transparent and reliable markets in the world. No one can hide the value of a dollar – whether in terms of yen, marks or pounds – or in terms of long-grain rice, Jack Daniels or garbanzo beans. To this degree, the scientific explanation of its value is moot: it has value because people value it. We know that this value is relatively predictable, because some people routinely make money predicting it, while others lose money by failing to.
It is not necessary to understand money in order to use it. We learn to spend money from an early age, and start to earn our own money soon after. We know that the monetary instruments or “money-things” we deploy in daily life are intrinsically worthless, but we all ignore this in a pragmatic, common-sensical way. Money “works” well enough. A few crackpots – well, more than a few – stockpile gold, ammo and freeze-dried mashed potatoes as their preferred stores of value, but money suits most of us just fine. Right up until someone plays the highlight-reel from the hyper-inflationary events in Weimar Germany or modern-day Zimbabwe. It is *possible* for the value of money to erode away to nothing. It has happened. And it started to happen right here in America in the 1970s. Inflation plagued that entire era – it harmed the lives and life-prospects of millions of people, many of whom are still around to remember those very unsettling times. So politicians, pundits and pointy-headed economists had better not soft-pedal the danger of inflation. And, as a result, they don’t. They instead down-play and soft-pedal the opposite danger – the *de*-flationary effect of recessions, depressions and slumps.
Both inflation and deflation call attention to the fact that the value of money in terms of everything else varies continuously – and can, sometimes, vary suddenly and catastrophically. So rational people should fear – and do fear – both of these things. But they fear inflation more, in part because more people have direct, personal experience of it but also because the danger of inflation is intuitive and microeconomic. If *my* money is suddenly made worthless, I am ruined. If my money can suddenly buy much more, well, exactly what is wrong with that? People *used to* have direct, personal knowledge of the destructive power of deflation, because there used to be a lot more recessions, depressions and slumps. These words are all synonyms, each having been invented to soften and normalize the previous one. All are descended from a common ancestor – “panic”.
People panic – react instinctively and fearfully – when the uncertainties surrounding money and the value of money are pointed out. It does not matter who points or for what purpose. Everyone on this site knows that our sole aim is to restore the health and well-being of people and economies which are being victimized daily by the predatory avatars of Big Greed Incorporated, a.k.a. financial capitalism, a.k.a. Wall Street. It doesn’t matter. People don’t believe us, or even if they do believe that our intentions are good, they still believe that we are playing with fire in a crowded theater – and that if we aren’t stopped and hushed up, there will be a catastrophic panic. People “know” that money is risky – and “know” that everyone else knows. So they think it incumbent, *especially* upon smart, knowledgeable people, that we maintain what *they believe to be an illusion* – namely, that our money is safe for now. It trades freely on world markets. It buys about as much soap and as salad dressing on one day as it does on any other.
The paradox – and it truly is one – is this: *explaining why money is safe* is universally interpreted as undermining it, while *maintaining the belief that it is far riskier than it really is* is seen as the only way to keep that risk at bay.
Unfortunately, just explaining Chartalism does little to unwind or resolve this paradox. It’s interesting, but it’s also pretty abstract. And since we have to admit that Chartalism – the concept of state money or tax-driven money – was already around in the 1920s, it clearly doesn’t stop Weimars or Zimbabwes from happening. Or Great Depressions, recessions, slumps or panics either. It’s fine to start with Chartalism, since it’s true and since it really does answer the question most people don’t believe can be answered – as to the objective origin of the value of money. But it doesn’t explain history. And here we contend with an Orwellian paradox layered onto our original one: “Who controls the past controls the future. Who controls the present controls the past.”
We all know who controls the present. What few people know with any clarity is the degree to which the powerful have used their power to fictionalize history- especially our economic history. I think this will be a battlefield of our insurgency-of-the-mind almost as important as the economic science itself. For while this science can indeed unlock our future, it can only do so after we have liberated the present – and, with it, the truth about our past.
Cheers
Dale,
Great idea. Let’s lead off with yours! Very well put.
If you are going to do something unprecedented and radical, make sure to be boring about it. Make the Debt Ceiling a political hostage? Who cares! No one, present company and other wonky types excluded, knows what the Debt Ceiling actually is. For many people the first time they heard of it was when our radical political faction, the Republicans, decided to hold it hostage.
A trillion dollar coin, though? That’s not boring, is it? That’s big JuJu, the blackest of black magic! It’s like Magica DeSpell’s lust for Scrooge McDuck’s “number one dime.”
The problem with the Trillion Dollar Coin is it’s so interesting. People’s eyes don’t glaze over when they hear about it. (It actually reminds me of this old story, Robert Kahre vs. Terrorism. Note, I think the author of this post is one of those “sovereign citizen” types, but I like reading this biased version of the story. Mainly because I’m sure this guy would be up in arms about the Trillion Dollar Coin, but doesn’t have a problem with a guy using face value of gold coins as a form of tax avoidance.)
One could fill up an entire book writing about the psychological issues about money if one considered the entire complexities of developmental, psychodynamic and cognitive-behavioral aspects of how humans relate. Obviously the boundaries of a comment section limit one’s self to just a few concepts. One must oversimplify these concepts for the sake of demonstration. Nevertheless these oversimplified concepts will make the point about why people become so emotionally charged about the issues of money.
I am going to present a few developmental concepts because they are easier to demonstrate than psychodynamic or cognitive-behavioral concepts. I am going to borrow from the work of Daniel Stern, who is the foremost authority on infant psychology, and Piaget who is known to anyone who has had any education in psychology.
Dr. Stern divided the interpersonal psychological development of the infant self into four parts: the emerging self (0 – 2 months), the core self (2 – 6 months), the subjective self (7 – 16 months) and the verbal self (17 – 24 months). Dr. Stern updated this development in 1998 in which he said that even the subject self begins to develop shortly after birth, but does not begin to become prominent until 9 – 10 months of age.
Primarily Dr. Stern was concerned with how infants relate to their primary caretaker, but he does describe that infants begin to relate to objects at 4 months of age. This development of object relationships is in parallel with the infant’s interpersonal development with its primary caretaker.
Piaget described how children develop psychologically by writing about their stages of thought processing. The stage of Concrete Operations (4 – 11 years old) is best demonstrated by taking a glass of milk and pouring the milk into a different glass that is shorter and wider and recognizing that the quantity of milk is still the same. The stage of Formal Operations (11 years of age and older) is the basis for abstract thinking which is needed in order to perform more complex intellectual processing by using abstract representations.
At this point I want to emphasize the following: we do not all think alike. I’ll state it again — We do not all think alike. As an example, some people do not fully develop a core self or a subjective self. Those people would have difficulty with self-other differentiation and realize that people have subjective experiences that are different than their own. Yet some of thes same people may have a well developed verbal ability and may even have an extensive ability in formal operations processing. The best analogy that I can give is that the house still gets built even if there are some significant bricks missing from the basement wall. In addition there are plenty of people who do not have well developed formal operations processing ability. They rely primarily on their concrete operations processing. Try to imagine explaining Modern Monetary Theory to people who relate to others or process information as I’ve just described. You could see how confusing and stressful MMT could seem under these conditions.
I’ll add one more concept, and that is the development of transitional object attachment. A good example would be the attachment of the Peanuts cartoon character Linus to his blanket. While transitional object attachment may in a limited number of people be consciously carried into adulthood, this attachment often persists unconsciously in adults to varying degrees. Imagine wrestling with the idea of a Trillion Dollar Coin under the condition of prominent unconscious transitional object attachment.
I’ve only scratched the surface with a few examples of how the issues of money can be so psychologically loaded. The issues of how people relate to money is much more complex. In the end, trying to understand the person thar one is talking to and understanding one’s self is the best method of communicating a concept such as MMT — and one can thus do so one individual at a time.
I would love to see an NEP article regarding the neutrality/super-neutrality/Non-neutrality of money.
That would be very helpful………….
fingers crossed!
There are two typing errors in the last paragraph of my last comment. The last paragraph should read:
I’ve only scratched the surface with a few examples of how the issues of money can be so psychologically loaded. The issues of how we relate to money are much more complex. In the end, trying to understand the person that one is talking to and understanding one’s self is the best method of communicating a concept such as MMT — and one can thus best do so just one individual at a time.
What is it About Money that Scares the Bejesus Out of People?
I dunno. But I do know that those TV & radio preachers know that there is Something about the Bejesus that Scares the Money out of People.
Couldn’t resist. 🙂
In my comment from 6:22 PM yesterday I mentioned that some people may not have a fully developed core self and subjective self. Some of these same people may still have developed a very good verbal ability and even have an extensive ability with formal operations processing. In this situation the person may seem highly skillful and very intelligent, yet have difficulty with self-other differentiation and difficulty with the realization that other people have different subjective experiences than their own. An extreme example would be the character Sheldon in “The Big Bang Theory” television series. On the surface Sheldon would understand some of the principles of MMT, but he would likely come up with his own economic theory which fits the way in which he perceives himself and the world around him. He would dearly hold on to his own theory and vigorously ward off any different ideas that others try to relate to him.
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Dr. Kelton,
After what I’ve been learning here, the wikipedia page for “money creation” is untrue. Would you have your people remediate that? 😉
By the way, wouldn’t it be the perfect time to mint that coin? The radcons (as well as the bamboozled dems) are about to flush the economy down the toilet. I think minting the coin would be like throwing a racoon into a catfight (however ill-conceived this metaphor is…).
-E