The People’s Money (Part 4)

Inflation & Consumption


Let’s quickly recap: I outlined, in PART 3, an argument that modern society has evolved in ways that necessitates a dramatic increase in public enterprise—yet, at the same time, we’ve doubled down on an old-world narrative about “money” that makes it mathematically impossible to meet that need. In PARTS 1 & 2 we reconfirmed a “modern money” perspective by simply observing the actual operations of the Federal Reserve—and reconfirmed, as well, how this new perspective holds out the opportunity to actually confront, through the efforts of public enterprise, the new challenges modern society faces.

It was my intention, at this point, to focus on the unfolding reality that climate change will soon prove to be the most dramatic challenge modern society is facing—and will be the challenge that necessitates, by far, the greatest need for goods and services produced by public enterprise. More to the point, climate change will generate the greatest need—by far—for implementing and managing a “modern money” perspective in America’s economy. While I still intend to pursue this argument, comments addressed to PART 3 have led me to change sequence: I realize now it will be ineffective (and perhaps futile) to discuss the extraordinary level of public spending that climate-change will necessitate without, first, attempting to address two related issues: (1) the stridently insistent warnings about “inflation,” and (2) the conundrum of the necessity for increased “consumption.”

I’ll begin this effort with a simple premise: It is willfully self-harming to confront a collective need—for which the labor and materiel are available to provide a remedy—but refuse to employ that labor and materiel by arguing that doing so will create an imbalance in the monetary system. This, for all practical purposes, is precisely what is being argued when direct sovereign spending is withheld from public enterprise out of fear of inflation. At that precise point, it seems to me, the tail begins wagging the dog—and there is very little concern for the dog itself.

Looking back from the year 2030

To visualize the issue, let’s imagine ourselves a decade hence, and all the money-intensive challenges we’ve earlier outlined (supported by our “modern money” perspective) have largely been met by the efforts of public enterprise. It’s the year 2030, and millions of Americans who previously struggled to get available health care can now walk into any doctor’s office, neighborhood clinic, or hospital emergency room with their universal coverage card. Millions of recent college graduates have seen their old tuition debts cancelled—and every high-school grad can now pursue higher education or technical training debt-free. Millions of children are now entering grade-school having been fully nurtured and prepared, during their pre-school years, to engage in becoming educated—and millions more, just coming out of maternity wards, are guaranteed high-quality pre-school care, if their family needs it. Millions of families, who previously struggled to find adequate housing at a price they could afford, are now part of a national housing co-op that builds and owns dwelling units and co-housing villages in every American community. Finally, we’ve succeeded in implementing the “Green New Deal,” transitioned primarily to zero carbon energy systems, and brought carbon emissions close to the stated parameters of the IPCC. In accomplishing all this, we’ve also established (just in time for the massive lay-offs of the AIbot revolution) a public enterprise economy that has put millions of Americans back to work nurturing, restoring, and rebuilding the health and diversity of our natural habitats and ecosystems, as well as designing and building climate-adaptive human habitats, systems and communities. We have, in short, made great strides toward our collective well-being.

There is, however, a “problem.” The problem is not that the $110 trillion price tag we’d initially placed on these accomplishments came in closer to $200 trillion. (It turns out that the Federal Reserve system was able to produce, for the purposes of public enterprise, $200 trillion in Reserves just as easily as it could have produced $110 trillion.) The problem we now confront, in 2030, is that the $200 trillion has been paid to American citizens and businesses for producing the goods and services just outlined! American families and businesses, in other words, now possess $200 trillion more to spend on food, clothing, housing, automobiles, electronic appliances, labor and materiel, etc. than they otherwise would have. From many perspectives this could be viewed as a genuinely good thing: a middle-class lifestyle has been extended, presumably, to a larger percentage of society, and private enterprise is positioned to thrive on that expanded market. From another perspective, however, there is a big problem—and an even larger conundrum. First: the “big problem.”

Inflation and Hyper-inflation

The simple logic of our old-world “money” narrative warns us that, because of that additional $200 trillion in spending power, prices for consumer purchases in 2030 must have dramatically risen to accommodate the extra money. Or, viewed from another perspective, the value of the U.S. dollars in everyone’s bank accounts must have dramatically fallen. This, in a nutshell, is the predicted “problem” of price inflation we received dire warnings about a decade ago (back in 2019) when this talk about a new need for public enterprise began.

The only previous experience America has had with this dynamic, however, indicates that, if properly understood and managed, it is not a threat, but an opportunity. That previous experience was the U.S. mobilization for World War 2. During the war, public enterprise expanded dramatically, employing, in one way or another, virtually every American citizen. Prices did go up—but were held in check in two ways: (a) strict wartime rationing of most consumer goods, and (b) payrolls that were partially made with war-bonds (i.e. future dollars). When the war was over, and the future dollars were made real, the sudden increase in consumer purchasing power was absorbed by the dramatic increase in the new production capabilities of private enterprise—capabilities that were built by the public enterprise of the war effort itself.

It would be reasonable to imagine this same dynamic has now unfolded in 2030. All those public enterprise efforts we’ve just described have resulted in expanded opportunities for private enterprise to offer goods and services for profit—with the expanded middle-class market standing ready (with all that money they’ve earned through public enterprise) to be the consumers.

But maybe not. Maybe—as we were just warned by two economists at the St. Louis branch of Federal Reserve itself—now, in 2030, we’d be experiencing hyper-inflation, just like “Germany in 1921-23, Zimbabwe in 2007-09, and Venezuela currently.” It’s disappointing that in their zeal to discredit the newly emerging “modern money” perspective, these economists found it prudent not to explain—or even point out—that in each of those instances of genuine hyper-inflation, the root cause was not “printing money” (as they infer “modern money theory” is all about) but something else instead. To say that “printing money” is the cause of hyper-inflation, it turns out, is like saying that flames are the cause of fire.

“Germany in 1921-23, Zimbabwe in 2007-09, and Venezuela currently,” all shared the same set of matches and kindling for starting the flames of hyper-inflation: a virtual total collapse of the production activities of their society. They stopped producing (or, in the case of Venezuela, importing) the things that people buy with money—and so, naturally, the money that existed (and continued to be issued to meet government obligations) drove up prices of the few things remaining on the store-shelves.

Quick message to the St. Louis FED from the year 2030: America hasn’t stopped producing things for consumers to buy. There are many more things to buy than in 2019 when the push for public enterprise began. So why should we imagine that we’ve turned out to be suffering from hyper-inflation? In fact, as we now enter the fourth decade of this century, we have a MUCH BIGGER problem to confront—a conundrum we should have been actively strategizing about much earlier than a decade ago.

The Earth’s “carrying capacity”

The conundrum faced by today’s modern society is a catch-22 of existential proportions:

  1. To confront the modern challenges society faces, public enterprise must step in and pay citizens and businesses massive quantities of currency to undertake strategic efforts that private enterprise cannot.
  2. To avoid serious disruptions from inflation, goods and services for private consumption must expand, commensurately, with the public enterprise spending.
  3. However, we have reached a tipping point where the typical goods and services of private consumption cannot be expanded without exceeding—and then collapsing—the “carrying capacity” of the Earth’s natural resources and regenerative systems.

The ramifications of this conundrum—this Catch-22 of the 21st century—define the ultimate challenge, it seems to me, of modern human society. It appears that something truly magical must occur if we are to go forward with a viable, livable future: We must, somehow, dramatically expand the goods and services of private consumption—making them available to greater and greater numbers of people—while simultaneously (a) reducing the consumption of finite resources, and (b) restoring and rebuilding the regenerative capacities of the Earth’s natural systems and habitats. To imagine there is any other path defies the physics of reality.

Looking down this path, it is certainly not clear how it can be done. What is clear, however, is that the old-world narrative of “money” offers us nothing but the prospect of chaos and conflict. As we’ll discuss in PART 5 to come, the perspective of “modern money theory,” however scary or controversial it may seem to mainstream thinkers, offers the very real possibility of hope.

12 responses to “The People’s Money (Part 4)

  1. Part of our societal challenge (it seems to me) is to re-direct the present ‘public enterprise’ effort to increase consumption. It seems to me that MMT style methods are being used to increase the well being of direct government payees, who spend more prolifically (thus helping indirect beneficiaries, who ultimately spend into the hands of slow spenders who provide the ‘wealth storage’ necessary when government increases available money year after year).

    I think you would like to redirect that public enterprise support into channels more supportive of your goals.

  2. In the St. Louis Fed publication you linked to, there is a sidebar containing the results of a survey in which 88% of economists disagreed with the statement “a country that borrows in its own currency should not worry about deficits.”

    What I’d like to ask these economists is: Does this make any sense? We all agree that the US Government creates money out of thin air. Why would a government that creates its own money out of thin air bother to borrow? If you could create money out of thin air would you bother to borrow? I wouldn’t. You wouldn’t. The economists wouldn’t. Nobody would. This makes no sense whatsoever.

    The answer is that there’s something going on with bond sales but it isn’t borrowing. You’d think professional economists employed by the Federal Reserve could figure this out.

    The very short story is that the Treasury creates bonds out of thin air and the Fed swaps reserve dollars that it has created out of thin air for those bonds which were created out of thin air. Then the Treasury spends those reserve dollars which were created out of thin air buying goods and services that the private sector has created out of thin air. The fact that these transactions occur in and through the “open market” doesn’t change the reality.

    This is all really obvious if you look at balance sheet transactions for the private sector, Fed, and Treasury through a fiscal cycle.

  3. Thanks for the perceptive post, getting quickly and clearly to the heart of the matter. MMT greatly expands the scope of governmental agency and the amount of economic activity it can generate. Yet as Bill Mitchell and others have long noted, MMT contains no values, other than efficiency, to guide that agency and activity. So you’re quite correct in observing that if the ends of the economy remain purely quantitative–the production and consumption of more and more things–then socialism will kill us as quickly (albeit more equitably) as capitalism, with or without MMT. Back in the early 1970s, E.F. Schumacher addressed these issues in “Small Is Beautiful,” and more recently, Mitchell and Fazi at least touched upon them in “Reclaiming the State.” If humanity and the rest of earth’s ecosystem are to survive in any currently-recognizable form, then the move we must make is not merely to socialism but to some form of eco-socialism–a democratic, centrally planned, regionally administered economy operating not only within environmental constraints but also working directly to restore the extensive damage we’ve already inflicted on nature. And this necessarily entails relearning the wisdom of “enough.” What I believe we desperately need at this moment are creative thinkers of the first order able to paint concretely detailed pictures of what an eco-socialist society would look like structurally, feel like existentially–pictures so vivid and inviting that one couldn’t help but say: “Yes, I can envision myself and everyone else living, and living well, like that.” Waiting in the wings, I hope and pray, even in this horizontal age so leery of “big narratives,” is a 21st Century Edward Bellamy, an extraordinary thinker and communicator capable of reigniting the human imagination with the compellingly beautiful portrait of a viable eco-socialist society.

  4. Growth in the money economy need not be reflected entirely or even primarily in material goods. A greatly expanded provision of medical services and education, for example, need not have nearly as large an effect on the ecosystem as the manufacture and consumption of unnecessary goods. You might even pay people to plant trees. You might employ more people in sustainable forms of agriculture, stepping away from the industrialization that has overtaken food production. What you probably do not want to do is implement measures that are likely to encourge significant (or really, any) population growth.

  5. “We must, somehow, dramatically expand the goods and services of private consumption… while simultaneously (a) reducing the consumption of finite resources, and (b) restoring and rebuilding the regenerative capacities of the Earth’s natural systems and habitats.”

    When it comes to this carrying capacity conundrum, you’re a little guilty of the same austerity disease you so well diagnose in others. A clean Earth is public property and just as private property must be expanded so it can provide material benefits, so too much public property be “produced” and “consumed” at a greater rate: clean air, cheaper medicine, stable climate, honest government and services, etc.

    I would include in that the development and expansion of technology research to make power generation, recycling and ecological restoration more efficient. The common knowledge produced by this research is a public good but the “consumption” of these public goods may not show up in standard statistics. Raising children, for instance, is socially valuable but not corporately profitable. Eliminating diabetes and cardiovascular disease cases by cleaning up the air improves lives but will depress sickcare rents (i.e., medical-industrial complex profits). Even campaigning, news-gathering and attention span are public utilities/public goods problems.

    Look on the carbon tax as an inflation fighting measure – similar to the effects of income taxes. Impose a carbon tax on new home technologies and you encourage greater efficiency in the global carbon budget which affects everything from temperatures to human health (via reduction of air pollution). This encourages greater efficiency the same way taxing away land rents or monopoly profits encourages competitiveness in the real economy. Think in terms of sectoral balances. Rebalancing away from a damaging medical/industrial complex towards a healthier economy will have long term payoffs but also short term losses.

    Measuring and maintaining public goods targets like clean air, longevity and ecological health might help with your conundrum. You can “expand the goods and services of private consumption” if their generation is far more efficient and when people are payed to restore and recycle degraded public spaces.

  6. Alt argues that during World War II, “Prices did go up—but were held in check in two ways: (a) strict wartime rationing of most consumer goods, and (b) payrolls that were partially made with war-bonds (i.e. future dollars). When the war was over, and the future dollars were made real, [and] the sudden increase in consumer purchasing power was absorbed by the dramatic increase in the new production capabilities of private enterprise …”

    That suggests that World War II was financed through involuntary savings, i.e., that wartime workers were paid in part with war bonds — as distinct from being urged to voluntarily purchase war bonds with part of their wages.

    In “How to Pay for the War,” J.M. Keynes did argue, on the basis of his experience in the British Treasury during World War I, that to finance the war the U.K. would need to use involuntary savings of the kind Alt describes in (b) above. The U.S. Treasury studied Keynes’ ideas, but it is my impression that it did not impose mandatory purchases of war bonds via payroll deductions. Instead, the U.S. used payroll deductions to collect taxes at higher rates and then used public campaigns to encourage voluntary purchase of war bonds. (Conduct internet search for “war bonds Bette Davis”.)

    Can Alt clarify what actually took place with respect to U.S. payrolls during World War II?

  7. Hi, Creigh: “In the St. Louis Fed publication you linked to, there is a sidebar containing the results of a survey in which 88% of economists disagreed with the statement “a country that borrows in its own currency should not worry about deficits.” …”

    Those 88% are not all of one mind. Some would be conditioning their answer on the resource demands arising from the deficits (and possible inflationary impacts). Others might condition their answer based on ecological impacts of the deficit (via resource demands, or downstream economic activity). Others could have other non-financial concerns.

    So the point about worrying or not worrying about the deficit could be pending on ramifications that have nothing to do with the ‘out of thin air’ issue, but have to do with real world, real economy issues, or ecosystem issues, or other.

  8. To the point raised about U. S. and British controls, how do the German controls relate as they carried out their rearmament in violation of treaties that were imposed post WW 1? Who assisted in circumventing those treaties?

  9. Creigh Gordon

    @Tim, yes it’s hard to say what all the specific objections were to the premise of the question. But I have seen lots of “unsustainable debt” objections, including in the linked article itself.

    I guess my frustration is that economists recognize that the government creates money out of thin air but don’t follow that concept to its logically necessary conclusions.

  10. Neil Wilson came up with an idea that we should just go back to using the Ways and means account before the Maastricht treaty banned the use of it..

    ” The Ways and Means Account is just an infinite overdraft with the Central Bank, and it grows over time to balance the net-savings of the non-government sector just as the Gilt stock does now.

    HM Treasury simply doesn’t issue any Gilts any more. Any funding of private pensions in payment should be done by offering annuities at National Savings, which would also have the neat side effect of ‘confiscating’ net savings and making the deficit go down.

    It’s irrelevant what interest BoE charges on the ‘Ways and Means’ account since any profit the BoE makes from it goes back to HM treasury anyway. So it can 50% if that gives the necessary level of satisfaction to mainstream economists.

    What you have is a standard intra-group loan account between a principal entity (HM Treasury) and its wholly-owned subsidiary. Normally those sort of loans are interest free for the fairly obvious reason that interest charging is utterly pointless, and they are perpetual for the same reason. Rolling over is totally pointless.

    Any term money can then be issued to the commercial banks directly by the Bank of England – up to three month Sterling bills.

    The interest rate to the banks from the Bank of England is a matter of the ‘capital development of the economy’. Almost certainly it would be ZIRP.

    If you are a member of a pension scheme then the savings of the current generation, plus the interest on Gilts and any income from the other assets owed pay the pensions of the current generation of pensioners. They are all, in effect, private taxation schemes that circulate money around the system.

    You’ll note that when there was a threat of people failing to save in pensions, the government introduced compulsory retirement saving – which is of course a privatised hypothecated tax.

    So in essence rather than the assets of a pension scheme being used to purchase Gilts, the assets would be used to purchase an annuity from the government dedicated to an individual. The result is that rather than the private pension receiving Gilt income from the state, to then pass onto the pensioner, the state would cut out the middleman (and their cut) and pay the pensioner directly as an addition to the state pension.

    There’s a whole private pension industry out there literally doing absolutely nothing of any real value. They can’t provide a guaranteed income in retirement without state backing in the form of Gilts. So what is exactly the point of having them? “

    Competition has turned out to be how to compete to rip off the customer the most. After brexit we need a competition authority with teeth and an anti monopolist agenda.

  11. Bill Mitchell has done an excellent 5 part series after his recent visit to Japan.

  12. TO RUSS WILLIS–Am reading Falter by Bill McKibben, and came across this quote from John Stuart Mill: “A stationary condition of capital and population implies no stationary state of human improvement. There would be as much scope as ever for all kinds of mental culture, and moral and social progress; as much room for the art of living, and much more likelihood of it being improved, when minds ceased to be engrossed by the art of getting on.” Your comment goes directly to the direction I want to pursue. The difficulty is that it’s not just enough to use MMT principles to pay people to plant trees—or pay people to sequester carbon in a myriad of other ways—we must also create new sustainable, or regenerative, goods and services for those people to buy with the dollars they earn. Otherwise, we either have hyper-inflation, or we exceed the carrying capacity of our natural systems.