Welcome to Finance and Fury, the Furious Friday. Last episode, we went through the combination of monetary and fiscal policy, larger scale of QE and the quick introduction to modern monetary theory. Today I was going to go through the recovery of the economy today, but will do more on modern monetary theory instead, as this is part of it and needs to be explained further before looking at the future working of the economy and how it is shaping up.
Conventional economics has struggled to explain much of what’s happening in the world today – Examples - How can we have record low inflation and interest rates at the same time? How can some governments continue to increase their deficits and yet their bond yields go down and currencies go up? How Governments issue bonds with a 30-year negative yield as who would buy them? Economists always are looking for new theories to explain these antithetical phenomena but also to rectify the problems created by the original theories This has triggered the current obsolete Economic theories to change - to another economic theory based around the control of the economy– Governments haven’t had enough control over the economy, see? Too reliant on CBs Unfortunately – more control over the economy seems to always be the trend for answers to problems – rather than taking any of the blame for the previously imposed policies – they come to the conclusion they just didn’t have enough control over the economy to make their policies work properly – it isn’t the theories problem – but you and I – we didn’t behave how they assumed we would – and what they assume is the determinate on the theory and models hence – monetary and governmental powers need greater control over the economy - why there is a big push for Modern Monetary Theory (MMT) What is it: a theory that describes the use of a fiat currency as a public monopoly from the issuing authority What does this mean – well – this one simple statement is pretty telling - Fiat currency – currency issued by decree (can’t use others) – but now it can be treated as a public monopoly – remember everything public isn’t us – but by the issuing state – the government – means the government takes over control of the currency and with it – the economy normally the government's central bank role – but MMT is the merging of the central banks with governments There is a lot of unpack in this concept – so to start - Where did it come from? - The basis of this theory of money argues that money originated when Governments attempted to direct economic activity – instead of other historical accounts where coinage as a medium of exchange was a spontaneous solution to the problems with barter The basic assumption of this whole theory is that fiat currency has value in exchange because of sovereign power to levy taxes on economic - activity payable in the currency they issue – The power comes from enforcement though – and through the nature of fiat – you cant use any other currency This theory though has its origins from a German economist Georg Knapp in 1905 - argued that "money is a creature of law" rather than a commodity – i.e. it only has value based around what Governments say versus the underlying purchasing power of a commodity – in most cases through history this has been Gold or silver at the time of this theory - the Gold Standard was what most countries used – form of metallism where paper money derived their purchasing power from the gold backing it – i.e. how many paper notes can you exchange for gold he argued the state could create pure paper money and make it exchangeable by recognising it as legal tender – so instead of having anything tangible backing it – the value of money could be anything the government said – but as long as they control it and can tax it This was the initial birthing ground of the Fiat system – but the Central banking system of today would seem foreign by Knapp’s days standards – Central Banks didn’t used to wield that much power – they were responsible for the nations funding mechanisms – but they weren’t in sole control of the amount of money or the cost – that was more free market based So Why now implement MMT– there are probably a multiple number of reasons – but the power of Central Banks has grown – IMO – beyond the Govs power when it comes to money or the economy – so now the Govs want to take some back – all in an effort to help us of course - MMT theory suggests that it can work based on the notion of employment - MMT advocates argue that the government could use fiscal policy to achieve full employment – create a working class - all through creating new money to fund government spending – Governments can spend to employ people – and raise the money themselves rather than tax But – based around this theory - the primary risk once full employment is reached is inflation - which they say can be addressed by raising and gathering taxes and issuing bonds to reduce money and the velocity of money in the system Under current Fiat – interest rates and inflation targets are the tools to help achieve full employment and economic growth
There is a lot of Theory to all of this – and the distinction between money is broken down into horizontal and vertical
As we stand today in the western financial systems – when it comes to the government raising funds – this is known as horizontal transactions – the money moves horizontally between the issuer – the Government – to investors – like pushing a wad of cash along a flat surface – simply changes hands back and forward but these "horizontal" transactions do not increase net financial assets to the economy or Government – as whilst the amount of cash being passed to the Gov in exchange for a bond increases the available funds they have- it is offset by liabilities – this is a problem for Governments – and macroeconomic theory Think about their funding mechanisms – taxation or debt – with Debt – i.e. bonds – they issue $1bn in bonds – they get $1bn in cash in return – but has the net balance sheet increase? They now have $1bn in cash (assets) but also owe $1bn in debt to the entity that bought that bond Therefore - MMT adherents state that the balance sheet of the government does not include any domestic monetary instrument on its asset side - as it owns no money - All monetary instruments issued by the government (bonds) are on its liability side and are created and destroyed with spending and taxing/bond offerings – horizontal transactions with no net benefit to the economy at large But this is where in MMT - "vertical money" comes into the picture – as now that cash raised from this bond can be passed down to us – vertical is this money entering circulation through government spending Keeping with the helicopter money policies – say that you have a fleet of helicopters – all hovering around – they pass money and debt instruments to one another – so they are moving horizontally – Essentially what QE has been doing – keeping the money at 1,000 feet above our heads and changing hands But now – those helicopters now drop this money onto us in the form of government spending Under the current Fiat system – the ability of Taxation and Government giving a currency the sole authority of legal tender enables them the power to raise debts (both for us borrowing in mortgages and them in bonds) Effectively - the value is done so through having demand through monopoly – we cant use anything else – In addition, fines, fees and licenses create demand for the currency All of these along with private confidence and acceptance of the currency, maintains its value – in the case of petro dollar – allowed for artificial demand through oil purchases in USD How does a government create money? Or have it as vertical money in the economy MMT argues governments mustspend in order to achieve full utilisation of an economy’s resources - similar to Keynesianism The first counter-intuitive point MMT makes is that government spending comes first and tax revenue flows from that. This can be tough to get your head around – brings up chicken or the eff debate – but there technically has to be money already in the economy before you can tax that money the first step is a government createsmoney by employing workers, paying pensions, unemployment benefits or spending on infrastructure, etc. So – due MMT theorist maintain that if government can issue and pay distribute its own currency at will rather than raising through debts – is can maintain the same level of taxation relative to government spending (the government's deficit spending or budget surplus) and all of this can be used as a policy tool that regulates inflation and unemployment - and not a means of funding the government's activities by itself But this requires governments to spend responsibly – have fiscal control – which is the fallacy of this theory – what Government in history has ever done this long term? Sure, one or two terms of leaders have managed this – but on average – they have not Especially if they want to change the horizontal to vertical - remember MMT labels any transactions between the government, or public sector, and the non-government, or private sector, as a "vertical transaction" But the justification of this is that if the government isn’t injecting newly created money into the economy, the only other way it can grow an economy is by people borrowing They say that as people borrow more and more, the only way growth would be supported is through lower and lower interest rates, courtesy of central banks - But at some point, people reach their borrowing limit and then it’s up to governments to create the growth – this is narrow minded thinking – what happened in the economy before the 1970s – or even 1913 – was there no growth in nations? Well there was – at massive rates compared to today – what created it? Technological innovation and free market ideologies – prior to this there wasn’t much growth – as the central powers of governments controlled everything – but from John Locke and the enlightenment era – saw a massive boom in not only in the economy but also quality of life – remember we are the economy – not a government The theory goes on - since it’s governments that create money they can never be insolvent, which means they are never financially constrained But they go on to state that they should be constrained by the resources available in the economy – which is the people – our labour – future productivity – but with higher levels of government spending – will productivity go up or down? The USSR had massive government spending – so did Mao’s china – issuing their own currencies - but it wasn’t until they gave back the productive ability to the people were actually able to feed themselves for a change Economists who like this theory - state that deficits don’t actually accumulate to become a burden on future generations with crushing interest rates or catastrophically weak currencies – The evidence - they say look at the US and Japan for confirmation of that – The only reasons they haven’t been paying it off is that they keep raising more debt to fund it – seems like a poor argument – so what? Governments just keep racking up the debts?
In summary - MMT's main tenets are that a government that issues its own fiat money:
Can pay for goods, services, and financial assets without a need to collect money in the form of taxes or debt issuance in advance of such purchases; Cannot be forced to default on debt denominated in its own currency; Is only limited in its money creation and purchases by inflation, which accelerates once the real resources (labour, capital and natural resources) of the economy are utilized at full employment; Can control demand-pull inflationby taxation and bond issuance, which remove excess money from circulation (although the political will to do so may not always exist); Does not need to compete with the private sector for scarce savings by issuing bonds.If governments had spent responsibly on doing what they should – the debts would have been quickly paid off – and we would be left off in a better position to cover any shut downs Instead – they continue to tax us to death – and eat out savings away with forced inflation – so when they choose to shut the economy down under enforcement of fines which would destroy businesses further – we as the economy are further trapped into relying on them – a lot of people don’t want to have to do this – see it in USA with 17m people all of a sudden out of work and relying on food banks to survive – lining up for 6 hours to get basic needs – whilst Nancy Pelosi (speaker of the house) is on a talk show talking about what is getting her through – a freezer full of $13 a tub ice-cream in a $24k fridge set up – as she thinks this make her relatable These are the sort of champagne socialists who come up with these theories – wealthy individuals in power
Government logic – our policies stuffed the economy – so we need more power to fix it – Repeatable cycle that creates so many problems
Next episode – continue to look into this – How this is going to be practically done – involves the merging of the central banks and Government Treasury – also – look at the increase of Crony capitalism – large companies in debt get bail outs – but most get to remain open –
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