Friday, June 24, 2011

A Modern Monetary Theory fairy tale

Money is as money does.  Money is as money was.  Factories idle, millions unemployed, a mountain of bad debt on their backs, how to prime the pump?  Haven’t we been here before?  How to produce to capacity when the Fed chief is confused between keeping the banks open (letting money circulate) and bailing out his Wall Street handlers (keeping bad debts on the books and fatally constipating the monetary economy).

With apologies in advance to all MMT’ers who may be offended, here’s what I take away from the MMT story, which is usually preceded with claims that it is the most amazing discovery in the history of humankind:

The Congress decides to set up their own printing presses (accounts at the Treasury backed by nothing, just like the rest of our money) and start spending money on the things that America needs:  supporting women and children in poverty; a massive infrastructure jobs program; basic research; early childhood and primary and secondary education; and so on.

The new money looks and feels just like the old money.  No currency even needs to be created; the old play money still works.  People get contracts to do work for the government and money shows up in their bank accounts.

Because the economy is in a deadly liquidity trap that the Fed chairman fails to understand will not be cured by zero interest rates, with a gigantic overhang of bad debt on the books of the banks that they are sending the American people into poverty to collect (after they’ve taken their homes), and because the labor market has been beaten down by Republican-inspired ideologues in Congress to the point where the labor share of national income is at its lowest level in a century, and because the Supreme Court has consistently ruled for corporations’ rights over worker rights, even giving the corporations carte blanche to buy politicians, and because Americans have let themselves become fat and stupid as their government has lulled them into a cowed stupor with terrifying pat-downs at airports, and Nazi-style police behavior (or whoever those people are), and with an unending televised onslaught of misinformation about taxes, the economy, terrorists threats, and all the other reasons they have to be afraid—for all these reasons working Americans have given up fighting and are cowering in their homes and apartments hoping they are not the next to be sent into hell, to live in their cars as long as they still own them, and then onto the streets, where they can see all around them in increasing numbers the end game of the American Dream (i.e., the capitalists—the corporate elites—won , and labor lost).

For all these reasons, inflation is not really a problem.  (And let’s be clear, Ron Paul, inflation is a general increase in the price level, not of the money supply alone).

So Congress continues to print money merrily, and ordinary Americans can feel the blood returning to their cheeks and money to their checking accounts as the miraculous circular flow of income and product expands, that which is necessary for an economy to be healthy, and which is terminally infarcted when most of the money ends up in the hands of a very few people. (The Fed objects that the money Congress is printing isn't backed by anything at the Fed, but Congress tells the Fed to shut up.)

When, years down the road and ten percentage points closer to potential output, a little bit of inflation does occur, the Congress orders the Fed to increase reserve requirements.  We don’t want so much of that credit money, Congress says, and Jamie Dimon whines that he can’t make a decent living anymore and moves to Russia.  Congress allows a mild inflation, however, which over the span of a number of years whittles away much of the real value of the debt.

The Congress also realigns the overall budget with sane national priorities (what a concept), reducing military adventures abroad and setting up a single-payer national health care plan, as American doctors, now mostly salaried but still doing well, have requested.  The health insurance companies whine that it is now too hard to make a decent living anymore and all open offices in developing countries.  And taxes are adjusted so that those who are taking the most out of the American economy are also expected to be those putting the most back in, proportionally speaking. 

A general awareness of the social welfare benefits of a more equal distribution of income and wealth inspires other policies that make everyone except the greediest persons feel much, much better about living in America.

It takes some practice but Congress learns that with reserve requirements approaching a hundred percent—with the big leverage gone from the banking system—that Wall Street- and bank-induced credit bubbles are much rarer and that control of the money supply is much easier.   Banks, of course, were prohibited from investment banking by the reinstitution of Glass-Steagall early in the reform period.  Capital ratios on investment banks were raised to twenty percent and any investment bank that goes bust in the new regime, goes bust.  No bailouts.  Banks are limited in size to two percent of GDP in assets.  Financial research proved long ago that big banks offered no economies of scale or scope.

After so many years, no one remembers that there had been a change in the money they are using.  It still looks and feels the same.  It is true that large numbers of one hundred dollar bills still go unaccounted-for, but that is considered a small price to pay compared to the massive wealth transfer from working Americans to the rich that occurred in 2008 and following years.  A Congressional office is established with a mandate to keep reserve requirements above ninety percent, and the Fed is disbanded.  The Church of Scientology makes an offer for their Washington, D.C., temple, but it is declined.  It becomes a museum dedicated to financial follies over the centuries. 

With the aggressive use of the power of Congress to take over the control of the money supply, the value of the American dollar decreased on the international markets faster than that of the currencies of nations that hold to the fictions of fractional reserve banking, credit money, bailouts, the IMF, the World Bank, and other foolishness.  The debasement of the currency, a failed goal of the prior Fed chair, is hailed by labor and industry alike as Chinese, Japanese and Indian companies rush to build factories and research centers in America.  Since the dollar has fallen, and oil is now being priced in a basket of currencies most of which are as weak as the dollar, oil prices rise—but they rise for everyone, as global growth and peak oil collide.  This factor as well makes it very advantageous for foreign companies to manufacture in America, which is still the second- or third-biggest market in the world.  The dollar even depreciates against the loonie and the peso, killing any chance of a North American monetary union (the example of the EU had pretty much killed enthusiasm for that idea anyway).

And America rises phoenix-like from the ashes of debt deflation, deleveraging, and depression.

(All right, MMT’ers, you’ve got to comment on this….) [corrected 6/25]


  1. And we can all hold hands and skip down the road of prosperity, singing songs about our great leaders in Washington who are wise and kind and selfless. We will all laugh at how easy it was! We just had to direct money and power to the right people. Why didn't we think of it before? Force those who innovate and produce to give most of their money to those who don't innovate and produce! Now that's an incentive plan for prosperity! And why did it take so long for America to wake up to the genius of a leviathan monopoly in medicine? After all who needs choice when your betters can make medical decisions for you? The dollar was saved and all it took Americans to arise zombie-like from the vestiges of a free market, chained down, lobotomized and drooling at the feet of elites politicians.

  2. The system is fatally rigged. The social contract is broken (Strauss & Howe). Until we come together and power and wealth are redistributed more fairly America will continue its descent into neo-feudalism. I can't imagine how reform can be accomplished given the electoral straitjacket voters are in.