Wednesday, November 30, 2011

To Read:

Monday, November 28, 2011

From the comments: technical details on MMT

In a recent post I said that
A country that runs a fiat currency doesn't "borrow", it prints and unprints money whenever it spends and taxes. If it issues bonds, it is to change the term structure of extant pre-printed currency, not to print more, or "sterilize" outstanding money.
This is technically not true, as was pointed out in comments by JKH. The comments are now about 100, so I wanted to pull out this point.

I've found that the greatest challenge in understanding MMT, or getting someone else to understand it, is that our heads are filled with lots of preconceived notions that limit our ability to see things from a new perspective. As Chuck Norris would say "you cannot fill a cup that is already full".

So I exaggerate and say that a government neither has nor does not have money, and that all spending is printing, all taxing unprinting, so shock the system out of its current paradigm into the new one. Maybe it works for some, maybe it doesn't. I found this helpful in making the leap, but it may not work for others. YMMV.

Technically, the central bank is the currency issuer, while the Treasury is just a user like everyone else. So now the question becomes, to what degree is the central bank part of the Government, and even if the central bank is ultimately a creature of Congress (in the US) then Congress needs to actually enact legislation that would combine the CB and Treasury functions to make the Federal Government proper a true "currency issuer".

Thanks to everyone, but JKH especially, for their comments.

Tuesday, November 22, 2011

Between Depression and Hyperinflation

Contra Megan, there is a middle ground between a Depression and Hyperinflation:
But it is not true that loads of debt is just fine as long as you're borrowing in your own currency, except in the trivial sense that a government which borrows in its own currency can always resort to hyperinflation. This is rather like saying, "Don't worry about that cancer--you can always shoot yourself!" If you take too much advantage of the benefits of borrowing in your own currency, pretty soon you have trouble borrowing in your own currency, which means that practically, the distinction is not necessarily as strong as some people pretend.
This is the conventional wisdom, believed by Austrian, Paul Krugman, and Greg Mankiw alike. A country that runs a fiat currency doesn't "borrow", it prints and unprints money whenever it spends and taxes. If it issues bonds, it is to change the term structure of extant pre-printed currency, not to print more, or "sterilize" outstanding money.

Too much printing can generate hyperinflation, but too little printing leads to low aggregate demand, unemployment, and lost real resources -- the very thing a country should be looking to maximize.

Monday, November 21, 2011

Bluff called -- no deal

The Supercommittee seemed not to reach any deal on debt. The question now is, will the automatic austerity measures go into full force, or will the Government find some way to defang them?

A New Deal for Europe

During the Great Depression, the New Deal represented a dramatically different sovereign structure in the US than what had existed before. Individual states--who had given up monetary sovereignty long ago--gave up political sovereignty as Academics joined forces with national politicians to run America.

The days of corporate paternalism and local politics was over.

I don't know how much State level resistance there was to this takeover. I'm guessing that your average unemployed worker didn't think much of his local politicians, and may have believed that the wise technocrats in DC were going to usher in better governance, and a better life. Maybe local politicians saw this centralization as a meal ticket to plummer plum jobs, and even more opportunities for power. Or maybe people saw it as a dreadful curtailment of States rights and fought against the changes. I don't know.

Nevertheless, I see parallels to this and the situation in Europe right now, as member nations, who gave away their monetary sovereignty when they joined the Eurozone, are now losing their political sovereignty as well and don't seem to have any desire to go back to their old currencies or their old politicians. I think Italians and Greeks would rather be ruled by Germans, they just want the Germans to be less stingy.

Friday, November 11, 2011

The Greek Central Banks wants to stay in the Euro

Greece will stay in the Euro and tolerate high unemployment for no reason because the Greek Central Bank wants to remain chained to the European Central Bank.

Greek central bankers, just like all central bankers, went to the same economics programs and learned the same nonsense about how deposits create loans, and how governments must tax in order to spend. Even if Greek wanted to go back to the drachma, I don't think there's anyone in Greece capable or interested in actually running a sovereign currency. Why bother when you can't tell the difference anyway?
Both Monti and Papademos look to be corporate liberal internationalists of the kind that in the U.S. end up in the Treasury Department. Papademos went to college and grad school at MIT and taught economics at Columbia from the mid-70s to the mid-80s. He even served as senior economist for the Federal Reserve Bank of Boston in 1980. Returning to Greece in 1985 to work as chief economist of the Bank of Greece, he rose to the post of the bank’s Governor; then served as Jean-Claude Trichet’s chief deputy at the European Central Bank from 2002 to 2010, returning again to Greece in 2010 to become an economic adviser to Prime Minister George Papandreou.

Monti went to college in Italy, but completed his graduate studies in economics at Yale, where he studied under James Tobin (which I suppose increases the chances that he supports a financial transaction tax). He was an economics professor and university administrator in Italy from 1970 through 1994, then was appointed to the European Commission, where he was handed various economic portfolios, including those on financial services and competition.
Where is their Financial Bismarck? How could such a man survive grad school?