by ChrisCook
Fri Mar 26th, 2010 at 05:21:22 PM EST
This blog post gives an interesting counter-view to the prevailing Keynesian and Monetary Orthodoxy which apparently goes by the name of Modern Monetary Theory (MMT).
What If the Government Just Prints Money?
As Congress gets set in the near future to consider raising the debt ceiling yet again, my fellow blogger L. Randall Wray creatively suggests not raising the debt ceiling but instead having the Treasury continue spending as it always does: by simply crediting bank accounts. As he puts it:
The anti-deficit mania in Washington is getting crazier by the day. So here is what I propose: let's support Senator Bayh's proposal to "just say no" to raising the debt ceiling. Once the federal debt reaches $12.1 trillion, the Treasury would be prohibited from selling any more bonds. Treasury would continue to spend by crediting bank accounts of recipients, and reserve accounts of their banks. Banks would offer excess reserves in overnight markets, but would find no takers--hence would have to be content holding reserves and earning whatever rate the Fed wants to pay. But as Chairman Bernanke told Congress, this is no problem because the Fed spends simply by crediting bank accounts.
This would allow Senator Bayh and other deficit warriors to stop worrying about Treasury debt and move on to something important like the loss of millions of jobs.
Wray's proposal is based upon modern monetary theory (MMT) that is the focus of this blog and those by Bill Mitchell, Warren Mosler, and Winterspeak. Of course, given the lack of understanding of basic reserve accounting at the heart of MMT and Wray's proposal on the part of the public, the financial press, and the vast majority of economists, one can already anticipate the outpouring of criticism suggesting that such a proposal amounts to "printing money" and thereby destroying the value of the currency. Some probably will even argue that this would put the US on the road to a fate much like Zimbabwe's (for a good analysis of what's actually happening in Zimbabwe, see here).
The MMT analysis appears to be along the same lines as my amateur brand of Coarse or Reality-based Economics, and to recognise, as
Henry Liu points out, that credit and debt are mirror images and that the money which is emitted by credit intermediaries in our deficit-based system is in fact a credit instrument, rather than a debt instrument.
The models of almost the entire economics profession are based on the false premise that it is debt which is being monetised. It is in fact credit that is being monetised, and this completely wrecks their assumptions.
My way of explaining the difference is to say that an undated Debt instrument is redeemable at the option of the provider of the finance, as anyone with a bank overdraft will know; while an undated Credit instrument (quasi-equity) such as QE, or notes and coin - which are essentially anonymously held QE (akin to bearer shares) - are redeemable/retirable at the option of the user of the finance.
But there is another nugget in the blog, in the link to a fascinating blog post on the subject of Zimbabwean inflation, which is always trotted out to illustrate the horrors of monetary and fiscal incontinence.
billy blog » Blog Archive » Zimbabwe for hyperventilators 101
Zimbabwe is the new Weimar Republic. Not! Zimbabwe is the front-line evidence that shows that government deficits will generate hyper-inflation. Not! Zimbabwe is the demonstration of the folly of a fiat monetary system. Not! Zimbabwe is an African country with a dysfunctional government. Yes!
The case made here is quite simply that the Zimbabwean inflationary problem was due to the complete collapse of the productive capacity of Zimbabwean land, made doubly lethal by the fact that it is in large part an agrarian economy.
Now, this case may be thought of as a self evident truism, of course, but it is entirely consistent with my view that far and away the greater part of money in existence today is actually based upon the use value of location/land, and that the solution to the credit crunch is therefore to monetise land rental value in a new way.
When you so comprehensively mismanage the supply side of your economy as the Zimbabweans did the only way to avoid inflation is to severely contract real spending to match the new lower capacity. More people would have starved and died than already have if the Government had have cut back that severely.
But this disaster has nothing much to do with budget deficits as a means to ensure high levels of employment in a growing economy (where capacity grows over time) where the non-government sector also desires to save. A private sector investment boom would have caused the same outcome both in inflation and the political problems of fighting it. So will the hyperventilators also say we should not have net private investment?
The historical context is important to understand because it created the political circumstances which have made the hyperinflation inevitable. But these historical vestiges from the colonial white-rule bear very little relevance to the situation that a modern sophisticated fiat monetary system will face.
Conclusion
So hyperventilate as you like but Zimbabwe does not make a case against the use of continuous budget deficits in defence of full employment.
Bad Governments will wreck any economy if they want to.
A wise government using the fiscal capacity provided to it by a fiat monetary system can engender full employment and equity yet also sustain price stability.
