by das monde
Wed Oct 13th, 2010 at 07:51:04 AM EST
Dean Baker, one of the economists that foresaw the US housing bubble and the financial crisis, wrote an article with the same title, "Why Printing Money Makes Sense", in the Guardian:
For the tens of millions of people who are unemployed, underemployed or have given up looking for work altogether, we are in a crisis. The economy is an absolute disaster, ruining their lives and also jeopardising the futures of their children and grandchildren.
But that is not the way that the people paid to contemplate economic policy in Washington see things. This gang is busy congratulating themselves because things could have been worse. They point out that if they had been even more incompetent that we could be in a second Great Depression with unemployment staying in the double digits for a decade.
Instead of worrying about the millions of unemployed workers today, they are worried about their deficit projections for the years 2018, 2020 or even 2025. This crew, which could not even see the $8tn housing bubble that was about to wreck the economy, wants the whole country to genuflect before their projections of deficits for 10-15 years into the future ....
To better understand [the] demand problem, suppose that we had a super-effective counterfeiter: someone who could make near perfect copies of $50 or $100 bills. Suppose this person printed up $2tn of counterfeit money and began to spend it on all sorts of items. Our counterfeiter buys up houses and cars. They pay for incredibly lavish parties and trips. They hire all sorts of servants, groundskeepers and investment advisers.
What would be the effect of this counterfeiting scam on the economy?
In the current situation, it would provide an enormous boost to GDP and create millions of jobs. After all, everyone thinks the money is real. It is no different whether the counterfeiter and his underlings spend $2tn of counterfeit money or if firms suddenly start investing their hoards of cash or households begin to spend again as though the housing bubble had never collapsed.
That may sound troubling, but this is because the current economic situation is so extraordinary. In normal times, the economy is, at least partially, supply-constrained. Collectively, we want more goods and services than the economy is capable of producing. If our counterfeiter manufactured his $2tn in normal times, it likely would cause a serious problem of inflation ....
In our demand-constrained economy, however, there is no problem of inflation. The economy can produce more of almost anything right now. The reason that we are not doing it is simply the lack of demand.
This is an interesting way to present the problem that Keynessians are fixating on: we have goods but no money to exchange them, because of massive cash hoarding.
But the interesting part of the counterfeiter story is that his $2tn of phony money will not create problems even in the long run, assuming that he is eventually shut down. Suppose that the counterfeiter's lavish spending gets the economy back towards full employment around 2012, at which point he gets nailed by the FBI who finally figure out how to recognise the dud notes.
At that point, the $2tn will be grabbed out of circulation and destroyed. Assuming that the economy is strong enough at this point to remain near full employment even as this counterfeit wealth disappears, then there would be no lasting damage from the episode. The fictional wealth had generated demand when the economy needed it, but then was pulled out of circulation at the point when it could have generated inflation and "competed away" goods and services from others.
Except that the people holding the dud notes at the discovery moment would be suckers of the magic. Nice?
While it is unlikely we will see a successful counterfeiter on this scale, the government and the Federal Reserve Board can imitate the counterfeiter's actions. This is the story of fiscal stimulus: safe, fun and legal. Instead of putting people to work filling the counterfeiter's frivolous whims, we could have them work to build up the economy and meet important needs. The list of necessary tasks is long and well-known.
As is the case with the counterfeiter's illicit stash, the stimulus spending need not even create any long-term debt burden. The Fed could simply buy and hold the bonds issued to finance the spending. When the economy returns to more normal levels of employment, the Fed would raise interest rates, as it always does, to prevent inflation from posing a serious risk.
Well, the title is then misleading - Baker is not talking about paying for the important needs by fresh banknotes without any "financing" through debt. And he pretends that Fed shareholders would gladly hold dud bonds... Is that "symmetrical" process with raising interest rates clear at all?
But the "naive" suggestion of just printing money and crediting workers with it already leaked in our discussions. That leads us back to basic analysis what the money is. To give an advanced start to a routine debate, I turn to the comment section of the Guardian article:
neilwilson: The tax bill from HM Revenue and Customs gives Sterling value. Unless you give them Sterling, you go to jail.
That is enough to get everybody in the UK to trade their labour and goods to obtain Sterling, and that kick starts the Sterling economy.
That, and the legal tender ability to pay off any debt with Sterling.
Of course if the government doesn't spend any Sterling, then you will go to jail anyway because no matter what you do and what you produce you can't get any Sterling from anywhere else.
With the fractional reserve banking, any credit issued by a bank adds its full amount to the Sterlings circulating around. Thus, as long as the total debt volume is on the rise (which is perhaps synonymous to economic growth to financial players), paying off taxes and debt is not particularly hard. But credit contraction indeed offers logically impossible problems.
... the notion of the currency issuer borrowing its own currency is a complete fabrication - left over from the gold standard era.
AleshaSoba: When a Government pays public sector workers, it is creating money. When a tax payment leaves the payers bank account, the money is destroyed forever along with its spending power.
The government and the Central Bank are separate institutions. One pours spirits, the other drinks... I mean, the Bank issues banknotes, while the government promises to pay back handsomely. Then the government may pay workers (but the money is already "created" by then). And the government takes taxes - but that is in no way "destroyed forever" money. Only if the Government pays its debt to the Central Bank (or perhaps other banks) this is so. Other than that, the government and its money is part of the economy.
Wolfstone: Only 3% of the money supply is actually printed. The other 97% is created out of thin air by bank lending or debt.
All money is debt, the rich own it and the poor owe it.
Not many people want to borrow money to invest in a legitimate business until there is an increase in demand. And there will be no increase in demand until the average consumer in the private sector earns more money. Of course this is an insoluble catch 22.
That's about right. A sovereign government could print out money without any strings attached (and that now would be as sensible as Baker describes), but that would piss off big "investors".
As (more or less) all money is backed up by credit obligations, it is paying back debt that takes money out of the economy "forever". And debt has to be paid back with interest, so some people have to fail...
neilwilson:The problem is savings - people deferring consumption. Great for the individual, but at the macro level it is like taxation - it reduces demand. So the government (the currency issuer) has to fill the gap unless they want the economy to shrink.
Government spending = Taxation + increase in people's savings
At the moment, lots of people are saving - paying off the debts they incurred during the boom period. That desire to save has to be funded by government spending or the amount of transactions will shrink, sales fall off and people will lose their jobs.
Is this something ethically right, blaming people (see "Great for individual...") for something completely prudent? If such an elementary action as saving for your own basic interest causes great depressions, how smart is this financial system? What is this economic system worth if it depends heavily on people spending out stupidly?
If cash hoarding is the problem, then let's see whether there is no greater form of it than saving by people with nearly minimal income. What about so called investments, especially into credit derivatives? Cash hoarding is where the cash accumulates. Shouldn't the rich people be nicer in letting cash circulate?
gantlord: I think you [Baker] deserve a lot of credit for spotting the housing boom, predicting the recession and for opposing the moral-hazar-ridden bank bailouts, but you have to help me out here. How is printing money anything but a massive tax on the holders of money?
Here perhaps comes the crux of the problem. Deficit spending is not a sincere objection from the money holders: their descendants would be the ones collecting national debt payments from ours. Printing money as a sovereign would upset them indeed. Not because inflation would be inevitable and swift, but because they would be loosing the maximal financial and social power they have now. They could enjoy aristocratic freedom for generations, while less lucky masses would be working for living and giving tithes for old term debts. Tithes? No, at best they would be rather leaving a tithe (1/10) to themselves and giving the rest to anonymous investors.
Remember Baker's scenario of destroying counterfeit wealth just in time for strong enough economy, with FBI fishing out the dud notes? In the way the money works as the mirror of debt, the housing bubble created enormous amount of counterfeit wealth - credit issued with full anticipation of numerous defaults and skewed social power. What about FBI tracking down that counterfeit wealth?!
So deep down, the economic issue is a moral one. Money is already the determinant of social privilege, personal freedom and future entitlements. Crediting working people now would only be a first sign of respect to labour, after years of Randian justice fantasies. Is insistence on paying back debt, however arbitrary incurred, the best fairness priority we can think of? Why do we allow (or give) enormous privileges and freedoms to ones, while others (increasingly many, in fact) have to work and sacrifice hell of their lives for very little in return? Is this gonna be a decent global society, incomparable to feudalism or slavery?
The dilemma of turning runaway social or economic norms is not a new one. For example, Henry George considered a similar land ownership dilemma in "Progress and Poverty". We went far ahead ignoring moral complexity of land ownership. How far ahead is left from here?