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talkpolitics2012-10-19 08:08 pm
peristaltor.livejournal.com) wrote in talkpolitics2012-10-19 08:08 pm
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Bond Burning Jubilee
(I'll try to make this money-ish post brief. As Twain noted of the Bible, fiscal policy is like chloroform in print form. This should, however, show that knowing the actual monetary creation process can take the sting out of what you are about to read.)
Steve Roth at The Angry Bear notes a growing trend among monetary policy wonks: maybe, just maybe, central banks should burn their government bonds as Ron Paul once suggested:
"MMT?" That would be the side-branch of economic thought called Modern Monetary Theory that has been effectively side-lined since the ascendency of Classical and Neo-classical Theory. MMT is one of the only economic schools of thought that recognize that banks actually exist and contribute to the economy's function in real and substantive ways. This Washington Post article from February gives a nice description of the dilemma between the camps:
Giggled. It seems Galbraith farted in econ church. After all, that "pay down the national debt, cut taxes, shore up entitlements or pursue new spending programs" does seem pretty standard economic dogma fair by today's standards. What the gigglers missed and what Galbraith—and, dare I say, perhaps even Ron Paul—understand is that the bonds represent debt in the same way that a mortgage represents an indebtedness to a bank, but that the bonds only represent a symbolic debt of money, as opposed to a tangible debt of a house.
And to the world's Central Banks and the US's Federal Reserve, money is just something they can print at will . . . which is what they've been doing.
Galbraith points out, though, that Central Bank/Fed printed money goes someplace where it does little good: bank vaults.
Many would argue that the printed dollars do do something; they prevent the bank from going bust, from the bank's reserves dipping below their critical fractional reserve requirement. Bankrupt banks cannot lend, and cannot therefore increase the dollars in the economy through that lending. This is the neo-classical rebuttal in a nutshell (minus the understanding of how banks create money, of course).
And this point of a soft economy shoots down the key argument against forgiving government debts: inflation.
Galbraith's point hints to a further problem; if the economy is at such a low point that the bank reserves need shoring, it's doubtful that anyone is lining up to take out new loans. Better to circulate those created dollars, not just lock them up in the banks. Since forgiving the bonds that created the QE dollars would do just that, the banks' reserve requirements would drop and lending would be (theoretically) freed. I still doubt it would help that much in a very, very soft economy, but it would be within the CB/FR's mandate to do so.
I say we should give the Central banking authorities more authority. Instead of giving the banks anything, the printed QE money should go directly into the economy in ways that stimulate spending. Take municipal bonds, those taken out to build transit, water and sewer systems, transmission lines, whatever, and repaid through taxation. Instead of another QE program, authorize the Fed to buy not bank assets, but muni bonds, especially those that improve the resilience of local economies, and then burn them, forgiving the debt in the process. This would relieve the taxpayers at the local level of their tax burden in a very real and direct way, freeing money to be spent elsewhere.
I suppose they could also buy delinquent mortgage loans and forgive those, but I prefer Iceland's more direct approach. No need to print money here; that would just reward the bastards who issued the NINJA paper in the first place. And more the direct approach had results:
The lesson here? There are a few. First, don't listen to most economists, especially the neo-classical variety, and really, really especially ignore those Faux-bel Prize winners. Alfred Nobel did not create the economics prize that supposedly bears his name. Allowing those charlatans to share a stage with actual scientists is a continuing insult and travesty. When banks issue prizes for theoretical work, expect that work to work in the banks' favor. This represents a conflict of interest of the highest order.
Which leads us to the second lesson: look to the more distant past. Every few years, rulers have had to declare a Jubilee, to forgive debts when those debts crippled the economies and lives of their subjects. Western economies haven't been doing that lately, and that has led to the stagnation we now call the Great Depression and Today. Neo-classical economics, largely bolstered by monied interests and acts of bold propaganda like the 1968 Faux-bel Prize creation, has transferred the burden from the lenders to the borrowers, corrupting millennia of effective monetary tradition. The banks are reaping the benefit from this transference, using their profits to pressure governments to revise bankruptcy laws and continue the persecution of borrowers, be they home owners or entire countries, simply so they do not have to take a loss on the shaky loans they issued.
Steve Roth at The Angry Bear notes a growing trend among monetary policy wonks: maybe, just maybe, central banks should burn their government bonds as Ron Paul once suggested:
In June of 2008, Ron Paul made a radical proposal: the Fed should simply burn all the U.S. Treasuries it’s currently holding, reducing the government (U.S. Treasury) debt by $1.6 trillion, or about 10%. . . .
Paul called this “bankruptcy,” but it’s actually pure MMT thinking, acknowledging that 1. the Fed and the Treasury are most reasonably viewed as a single consolidated entity (“the government”), and 2. that government debt is something of a side issue in the big monetary picture (bonds are a vehicle for interest-rate management by the Fed), compared to the matter of central importance: how much newly created money the government puts into the economy by deficit spending, or takes out with a surplus (destroying more money by taxing than it creates by spending).
"MMT?" That would be the side-branch of economic thought called Modern Monetary Theory that has been effectively side-lined since the ascendency of Classical and Neo-classical Theory. MMT is one of the only economic schools of thought that recognize that banks actually exist and contribute to the economy's function in real and substantive ways. This Washington Post article from February gives a nice description of the dilemma between the camps:
About 11 years ago, James K. “Jamie” Galbraith recalls, hundreds of his fellow economists laughed at him. To his face. In the White House.
It was April 2000, and Galbraith had been invited by President Bill Clinton to speak on a panel about the budget surplus. Galbraith was a logical choice. A public policy professor at the University of Texas and former head economist for the Joint Economic Committee, he wrote frequently for the press and testified before Congress. . . .
But if Galbraith stood out on the panel, it was because of his offbeat message. Most viewed the budget surplus as opportune: a chance to pay down the national debt, cut taxes, shore up entitlements or pursue new spending programs.
He viewed it as a danger: If the government is running a surplus, money is accruing in government coffers rather than in the hands of ordinary people and companies, where it might be spent and help the economy.
“I said economists used to understand that the running of a surplus was fiscal (economic) drag,” he said, “and with 250 economists, they giggled.”
Giggled. It seems Galbraith farted in econ church. After all, that "pay down the national debt, cut taxes, shore up entitlements or pursue new spending programs" does seem pretty standard economic dogma fair by today's standards. What the gigglers missed and what Galbraith—and, dare I say, perhaps even Ron Paul—understand is that the bonds represent debt in the same way that a mortgage represents an indebtedness to a bank, but that the bonds only represent a symbolic debt of money, as opposed to a tangible debt of a house.
And to the world's Central Banks and the US's Federal Reserve, money is just something they can print at will . . . which is what they've been doing.
Galbraith points out, though, that Central Bank/Fed printed money goes someplace where it does little good: bank vaults.
The Fed generally uses one of two levers to increase growth and employment. It can lower short-term interest rates by buying up short-term government bonds on the open market. If short-term rates are near-zero, as they are now, the Fed can try “quantitative easing,” or large-scale purchases of assets (such as bonds) from the private sector including longer-term Treasuries using money the Fed creates. This is what the Fed did in 2008 and 2010, in an emergency effort to boost the economy.
According to Modern Monetary Theory, the Fed buying up Treasuries is just, in Galbraith’s words, a “bookkeeping operation” that does not add income to American households and thus cannot be inflationary.
“It seemed clear to me that . . . flooding the economy with money by buying up government bonds . . . is not going to change anybody’s behavior,” Galbraith says. “They would just end up with cash reserves which would sit idle in the banking system, and that is exactly what in fact happened.”
Many would argue that the printed dollars do do something; they prevent the bank from going bust, from the bank's reserves dipping below their critical fractional reserve requirement. Bankrupt banks cannot lend, and cannot therefore increase the dollars in the economy through that lending. This is the neo-classical rebuttal in a nutshell (minus the understanding of how banks create money, of course).
And this point of a soft economy shoots down the key argument against forgiving government debts: inflation.
The risk of inflation keeps most mainstream economists and policymakers on the same page about deficits: In the medium term — all else being equal — it’s critical to keep them small.
Economists in the Modern Monetary camp concede that deficits can sometimes lead to inflation. But they argue that this can only happen when the economy is at full employment — when all who are able and willing to work are employed and no resources (labor, capital, etc.) are idle. No modern example of this problem comes to mind, Galbraith says.
Galbraith's point hints to a further problem; if the economy is at such a low point that the bank reserves need shoring, it's doubtful that anyone is lining up to take out new loans. Better to circulate those created dollars, not just lock them up in the banks. Since forgiving the bonds that created the QE dollars would do just that, the banks' reserve requirements would drop and lending would be (theoretically) freed. I still doubt it would help that much in a very, very soft economy, but it would be within the CB/FR's mandate to do so.
I say we should give the Central banking authorities more authority. Instead of giving the banks anything, the printed QE money should go directly into the economy in ways that stimulate spending. Take municipal bonds, those taken out to build transit, water and sewer systems, transmission lines, whatever, and repaid through taxation. Instead of another QE program, authorize the Fed to buy not bank assets, but muni bonds, especially those that improve the resilience of local economies, and then burn them, forgiving the debt in the process. This would relieve the taxpayers at the local level of their tax burden in a very real and direct way, freeing money to be spent elsewhere.
I suppose they could also buy delinquent mortgage loans and forgive those, but I prefer Iceland's more direct approach. No need to print money here; that would just reward the bastards who issued the NINJA paper in the first place. And more the direct approach had results:
Iceland’s $13 billion economy, which shrank 6.7 percent in 2009, grew 2.9 percent last year and will expand 2.4 percent this year and next, the Paris-based OECD estimates. The euro area will grow 0.2 percent this year and the OECD area will expand 1.6 percent, according to November estimates.
The lesson here? There are a few. First, don't listen to most economists, especially the neo-classical variety, and really, really especially ignore those Faux-bel Prize winners. Alfred Nobel did not create the economics prize that supposedly bears his name. Allowing those charlatans to share a stage with actual scientists is a continuing insult and travesty. When banks issue prizes for theoretical work, expect that work to work in the banks' favor. This represents a conflict of interest of the highest order.
Which leads us to the second lesson: look to the more distant past. Every few years, rulers have had to declare a Jubilee, to forgive debts when those debts crippled the economies and lives of their subjects. Western economies haven't been doing that lately, and that has led to the stagnation we now call the Great Depression and Today. Neo-classical economics, largely bolstered by monied interests and acts of bold propaganda like the 1968 Faux-bel Prize creation, has transferred the burden from the lenders to the borrowers, corrupting millennia of effective monetary tradition. The banks are reaping the benefit from this transference, using their profits to pressure governments to revise bankruptcy laws and continue the persecution of borrowers, be they home owners or entire countries, simply so they do not have to take a loss on the shaky loans they issued.
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In this case, as you can see by the link, Paul thinks he's doing one thing when he's doing something different by MMT standards. Wrong reason, right action. Even a broken clock is right twice a day.
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"Bolon Yok'te Ku is a Mayan god; his name means "Nine Foot Tree. . . ."
(cited from John Michael Greer, Apocalypse Not: Everything You Know About 2012, Nostradamus and the Rapture is Wrong, Viva Editions, 2011, p. 155.)
Nine Foot Tree parties, everyone! Let's all dress as the descending Nine Foot Tree!
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. . . you think it's someones fault?
When policy makers and shakers use theory to guide their actions, they should first make sure the theory actually works. When it doesn't, they should shoulder the blame. Oh, and those theory-holding policy makers hold office in the EU as well.
I have no problem with currency falling from commanding heights. Our US dominance is mostly built on our over-extended military and our zeal to stir shit up with said firepower just to preserve access to the hydrocarbons that keep us driving so very, very much. If we re-localized, things would look better by far.
To get us out of this shit, we need not to stir shit up but to get our shit together.
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'Greenback' is an irrelevant term. Don't know what's this FX community you're talking about, but 'greenback' doesn't mean dollar. That's all.
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"Greenback" was a dollar, as I pointed out above, but a very specific kind of dollar. Now it's just a general slang term like buck.
The only reason I object to Greenback is the obscure reference to the Greenbacker movement, to which the poster might or might not be aware.
No harm, no foul.
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1. The economy is too weak for inflationary pressures to have significant effect.
2. The money generated by QE is going to banks who are sitting on it, negating inflationary pressure because it's not really circulating.
Won't #2 be negated by your proposal to buy and immediately forgive muni bonds? Wouldn't such a program greatly incentivize local infrastructure development, as munis learn that they can do things at lower-than-listed costs, thus leading to economic recovery that would dilute the effects of #1? Which is the stronger anti-inflation pressure, and how long until bypassing #2 and reducing the impact of #1 does begin to cause noticeable, problematic inflation? How do we keep the reins on that?
Second:
Economists in the Modern Monetary camp concede that deficits can sometimes lead to inflation. But they argue that this can only happen when the economy is at full employment — when all who are able and willing to work are employed and no resources (labor, capital, etc.) are idle. No modern example of this problem comes to mind, Galbraith says.
I know it's probably like raising Hitler in a civil liberties argument, but what about Zimbabwe? It was my impression that Zimbabwe got itself into trouble by borrowing huge sums when under full utilization (particularly of its farms, due to some wonky redistribution schemes) and then printing its way out of the hole. Am I incorrect? (Just say yes/no, and I'll endeavor on my own to figure out why -- don't want you to have to go too far off-topic to correct my understanding)
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1. Yes. Our economy has been predicated in the last few decades on the housing boom, where ever cheaper transportation costs have made far-flung single-family and small business construction more cost-effective than construction or re-development closer to existing population centers, enough that new home buyers drove until they qualified. With the only new money entering the economy coming from the QE programs and gas still near or over $4/gallon, those farthest-flung developments are emptying and we are ever so slowly re-concentrating our population, a process that will take decades. Until that happens, and until we find a new and stable source of go-juice, the US's real economy will not expand.
2. Yes.
Won't #2 be negated by your proposal to buy and immediately forgive muni bonds?
My proposal for the muni bonds is just that, a proposal. If it is ever implemented (which I doubt will happen) it will have to be implemented in a funny way. Not all muni bonds are created equally. Many built water and sewer in those far-flung locations; no need to pay those off, since to recover, to truly recover, the ex-urbs must be all but abandoned. Other bonds, such as new freeway construction, can be ignored. Light rail, inner-city trollies, city water and sewer, these would be the best first targets.
Even then, not all would be forgiven. There wouldn't be enough money to do so, first off.
Wouldn't such a program greatly incentivize local infrastructure development, as munis learn that they can do things at lower-than-listed costs, thus leading to economic recovery that would dilute the effects of #1?
Only if muni payoff were guaranteed, which it never will be. Muni projects usually take years to finish, but the payouts usually cover decades. The best targets for QE-styled purchases would be those where the projects are complete but the bonds still outstanding, so fudging the numbers would be fruitless.
Furthermore, if targeted well, the pressure you mention would be just the opposite of what you describe. Planners would realize that buy-back targets are only the most cost-effective projects that lead to increased economic resilience. These would be the only projects funded in the future. The argument that the buy-back would not touch the sillier projects might be enough to kill boondoggles before they get funded by the voters.
Consider that not all toxic assets were bought by QE. Many still sit festering on the books.
Zimbabwe, as I understand it, did borrow heavily and at the same time kicked the (mostly white) professional farmers off the land, giving that land to administration cronies who didn't know how to farm. In just a few years the country went from a net food exporter to rampant hunger. Rather than write off the loans as the farms collapsed, they printed. People who held Z. currency dumped it, furthering the hyperinflation.
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2.) But was Zimbabwe at full employment/utilization? Or is it not apropos for some other reason?
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I thought of including the California proposal in the OP, but went with the Icelandic Solution instead.
2.) I honestly don't know. I suspect that if an administration meddles enough in a country's currency affairs, all bets are off as to what will happen next. The Galbraith stipulation simply might not apply here.