Tag Archives: money

The Onion on temporary money

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If I share an article from The Onion, it is usually obviously a joke. But this one go me thinking:

WASHINGTON—In a unique and limited-time offer for residents of the United States only, Janet Yellen announced Tuesday that Americans could use the promo code “THANKS” for 10% off all U.S. goods and services. “This Thanksgiving, the Treasury Department is saying ‘thanks’ with an exclusive promotion just for taxpayers, whether you need a pack of gum or a new car,” said the Treasury Secretary, who urged Americans to redeem the incredible offer today, stating that she herself was a “huge fan” of U.S. goods and services, which she loved and used every day. “To activate the promo code, simply mention it to your Whataburger cashier, or visit treasury.gov/thanks. Remember, this amazing offer won’t last, so now’s the time to book that babysitter or finally get that Instant Pot! Again, that’s T-H-A-N-K-S, thanks.” At press time, Yellen added that the offer was for first-time U.S. consumers only.

The Onion

So we’ve had this massive economic stimulus – both monetary (low interest rates and “quantitative easing”, which they tell us is printing money but without the paper or coins, just willing it into existence in our computers collective imaginations) and fiscal (the government borrowing money from itself, which is another way of willing it into existence, and giving it back to us as “tax credits”, sometimes by writing numbers in our bank statements each month). A problem with just passing out money is that the poor spend it, but the middle class only spend some of it and the rich just squirrel it away. So you end up with a ton of money sitting around, and then when demand picks up people suddenly start spending it, and the real economy cannot ramp up supply instantly, so prices have to go up to put the brakes on demand and bring it down to what is actually supplied. Gradually, we hope supply will catch up and the rate of price increases will stabilize to something normal. The danger is that people can keep demanding higher wages, companies can raise prices to cover the higher wages, and the system can spiral from there. There are time lags built into the system so while prices can change quickly, the underlying real economy can’t.

So at least part of the root of the problem is people saving rather than spending stimulus money, then spending it unexpectedly. So what if you did have a kind of money that was more like a coupon with an expiration date, and could only be spent in a limited time frame, but not saved long term. Businesses would have to be willing to accept it. This might be accomplished easily if they knew they could use it to pay their taxes. The federal government would have to agree to accept the temporary money as tax payments, and get state and local governments to fall in line. People will speculate on anything given the chance, so the government might have to outlaw complex trading arrangements or derivatives based on the temporary currency.

modern monetary theory

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This might be the clearest explanation of modern monetary theory for the layman (like me) that I have seen so far. This is specifically in a developing country context.

Kaboub is an advocate of Modern Monetary Theory (MMT), an approach that views states as the source of money creation through the issuing of currency, and taxation as the destruction of that money supply. In this formulation, states do not use taxes to fund policies but rather create funding through issuing currencies, while taxation is used to curb inflation or disincentivize social practices that are seen as harmful, such as pollution or extreme inequality. MMT has grown increasingly popular among left-leaning politicians in North America and Western Europe, and is beginning to make its way into African political discourse as well.

Rosa Luxemburg Stiftung

Money is a store of value and a means of exchange, I learned in my one or two lectures on the subject in the 1990s. I’ve always wondered if you could separate the two by having one form of money that has an expiration date and one that does not. Of course you can – think of coupons or frequent flyer miles. If you need to stimulate the domestic economy, you can use the one with the expiration date. You would use the other in international trade, for retirement savings, etc. You would have to decide if you would let people pay taxes in the temporary currency. Businesses would have to decide if they are willing to accept the temporary currency, unless you forced them. An exchange rate would probably develop between the two forms of currency, unless you outlawed that. Prices and exchange rates could be volatile. New mutant forms of debt and derivatives would probably arise. Foreigners and corporations would speculate and manipulate unless you tried to stop them. Come to think of it, maybe there is a reason currency is the way it is and the status quo is hard to change.

Modern Monetary Theory

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The Intercept has a long article on Modern Monetary Theory.

In a nutshell: MMT proponents believe that the government can safely spend far more money than it currently does, and increasing the federal deficit is not a bad thing in and of itself — a public deficit is also a private-sector surplus, after all.

While typically we hear rhetoric that our political leaders must first “find” money through new taxes or budget cuts in order to pay for new programs, MMT proponents say that’s a fundamental misunderstanding of how money works. In so-called fiat currency systems (meaning societies in which money isn’t backed by physically valuable commodities like gold or silver) governments literally create the money and tax it later to control for inflation and keep it in demand.

Inflation is still a risk, MMT advocates say, but it’s a much more remote risk than mainstream economists let on, and it’s one that can be addressed down the line if it arises, without so much pre-emptive austerity.

They also talk about the idea of a federal jobs guarantee.

I just had a few college economics courses, but the idea seems risky. By expanding the money supply so drastically, I thought you risked hyper-inflation and a devaluing of your currency relative to others. Of course the U.S. can push it further than other countries, but there still must be a breaking point. But the idea of some kind of counter-cyclical automatic investment in infrastructure, education, training, and research is appealing to me. This could kick in if unemployment hits a certain level, growth falls below a certain level, or some combination of the two. Then during stronger economic times, the government steps back and lets the private sector take the lead. I think it would have to be some kind of formula or else the politicians will ruin it.

more on money, economic growth, and sustainability

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Here’s a new study looking at economic growth, interest rates, the money supply, and ecological footprint.

Ecological monetary economics: A post-Keynesian critique

The monetary analysis of some ecological economists currently appears to be mostly articulated around the following core: a stationary economy (and a fortiori a degrowth economy) is incompatible with a system in which money is created as interest-bearing debt. To question the relevance of the debt-money/positive interest rate/output growth nexus, this paper adopts a critical stance towards the currently emerging ecological monetary economics from the standpoint of another strand of heterodox economics – the post-Keynesian approach. In its current state, ecological monetary economics is at odds with post-Keynesian economics in its analysis of the money–growth relationship. This will be shown using the theory of endogenous money and a simple Cambridgian–Kaleckian model where debt-money and a positive interest rate are compatible with a full stationary economy.

the future of payments

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Here’s an article on the future of payments. Not only is cash becoming obsolete, but the idea of a physical credit card is quickly becoming obsolete, replaced right now by mobile apps, and eventually by RFID implants and facial recognition. Somehow money that is just invisible transactions in the air seems less real to me. But then, credit cards seemed less real than cash just recently, and before that paper money seemed less real than gold and silver. Eventually, we will get used to this too an it will seem real. Of course, any form money is only as real as we collectively beiieve it to be.

credit, interest, and a steady state economy

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This article in Ecological Economics says that a positive interest rate and a no-growth economy could coincide.

Does credit create a ‘growth imperative’? A quasi-stationary economy with interest-bearing debt

This paper addresses the question of whether a capitalist economy can ever sustain a ‘stationary’ (or non-growing) state, or whether, as often claimed, capitalism has an inherent ‘growth imperative’ arising from the charging of interest on debt. We outline the development of a dedicated system dynamics macro-economic model for describing Financial Assets and Liabilities in a Stock-Flow consistent Framework (FALSTAFF) and use this model to explore the potential for stationary state outcomes in an economy with balanced trade, credit creation by banks, and private equity. Contrary to claims in the literature, we find that neither credit creation nor the charging of interest on debt creates a ‘growth imperative’ in and of themselves. This finding remains true even when capital adequacy and liquidity requirements are imposed on banks. We test the robustness of our results in the face of random variations and one-off shocks. We show further that it is possible to move from a growth path towards a stationary state without either crashing the economy or dismantling the system. Nonetheless, there remain several good reasons to support the reform of the monetary system. Our model also supports critiques of austerity and underlines the value of countercyclical spending by government.

Herman Daly on the negative interest rate

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Negative interest rates are even more of a brain-twister than zero interest rates. Here is what Herman Daly has to say about that:

Suppose for a moment that GDP growth, economic growth as we gratuitously call it, entails uneconomic growth by a more comprehensive measure of costs and benefits — that GDP growth has now begun to increase counted plus uncounted costs by more than counted plus uncounted benefits, making us inclusively and collectively poorer, not richer. If that is the case, and there are good reasons to believe that it is, would it not then be reasonable to expect, along with Summers, that the natural rate of interest is negative, and that maybe the monetary rate should be too? This is hard to imagine, but it means that savers would have to pay investors (and banks) to use the funds that they have saved, rather than investors and banks paying savers for the use of their money. To keep the GDP growing sufficiently to avoid unemployment we would need a growing monetary circular flow, which would require more investment, which, in turn, would only be forthcoming if the monetary interest rate were negative (i.e., if you lost less by investing your money than by holding it). A negative interest rate “makes sense” if the goal is to keep on increasing GDP even after it has begun to make us poorer at the margin — that is after growth has already pushed us beyond the optimal scale of the macro-economy relative to the containing ecosphere, and thereby become uneconomic.

A negative monetary interest rate means that citizens will spend rather than save, so savings will not be available to finance the investments that produce the GDP growth needed for full employment. The new money for investment comes from the Fed. Quantitative easing (money printing) is the source of the new money. The faith is that an ever-expanding monetary circulation will pull the real economy along behind it, providing growth in real income and jobs as previously idle resources are employed. But the resulting GDP growth is now uneconomic because in the full world the “idle” resources are not really idle — they are providing vital ecosystem services. Redeploying these resources to GDP growth has environmental and social opportunity costs that are greater than production benefits. Although hyper-Keynesian macroeconomists do not believe this, the micro actors in the real economy experience the constraints of the full world, and consequently find it difficult to follow the unlimited growth recipe…

These painful choices could be avoided if only we were richer. So let’s just focus on getting richer. How? By growing the aggregate GDP, of course! What? You repeat that GDP growth is now uneconomic? That cannot possibly be right, they say. OK, that is an empirical question. Let’s separate costs from benefits in the existing GDP accounts, and develop more inclusive measures of each, and then see which grows more as GDP grows. This has been done (ISEW, GPI, Ecological Footprint), and results support the uneconomic growth view. If growth economists think these studies were done badly they should do them better rather than ignore the issue.

Herman Daly on the zero interest rate

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Herman Daly weighs in with a brain twister on money, interest rates, economic growth, and environmental degradation.

There are many things wrong with a zero interest rate. Remember that the interest rate is a price paid to savers by borrowing investors. At a zero price, savers will save less and receive less return on past savings. Savers and pensioners are penalized. At a near zero price for borrowed funds, investors are being subsidized and will invest in just about anything, leading to many poor investments and negative returns, furthering the economy’s already advanced transition from economic to uneconomic growth. Zero interest promotes an infinite demand for savings with zero new supply. But the “supply” is provided artificially by the Fed printing money. The infinite demand would be checked by the rising costs of natural resources and environmental damage if those costs were internalized, but they are not. Yet the environmental costs are real and do not disappear just because they are not counted. With free money and uncounted environmental costs, why not invest heavily in fracking? A very unequal distribution of income does check demand, at least for non-luxury goods. Rich people have an increasing surplus of money to invest, which also helps hold down the interest rate. Yes, mortgage rates fall, and that benefits citizens as home buyers, but they lose more in terms of their retirement accounts. And there is still a significant spread between the zero rate paid to savers and the positive rates charged on credit card and other debt, so the banks are doing quite well.

I’m with Mr. Daly all the way on his concept of “uneconomic growth”. Our primary measure of economic activity, GDP, is simply a sum of how much money changes hands. Some of the reasons money changes hands are good (benefits), and some are bad (costs). Let’s take the example of a factory that makes something that makes peoples’ lives happier or better. The money that changes hands to buy the product is a reasonable estimate of the value of that product, so since it is good we can call this the benefit. However, if the factory produces pollution, that is a cost. However, if people get sick and have to go to the hospital because of the pollution, we will count the money they spend as part of GDP. We will add the cost and benefit, when we should be subtracted the cost from the benefit, to get a net benefit. So we could try to measure net benefits each year and see if they are increasing, and that would be a better measure of human wellbeing than GDP. There are some attempts to do this, but they don’t have widespread acceptance.

I am basically agnostic on monetary policy though, because (like 99.9% of the population) I just don’t understand it well enough. My basic understanding is simply that turning the printing press over to the politicians is very risky, so we allow it to be controlled by a technocratic public/private hybrid entity instead. When money is created, it has to be repaid with interest, which creates some level of discipline and restraint in its creation. If there is not enough money, that creates a serious problem. If there were no discipline or restraint in its creation, it would cease to have any value at all. Both are dangerous. This may be a case of “if it ain’t broke, don’t fix it”, although the system is clearly imperfect. To be fair, Herman Daly’s proposal appears to be to create some sort of technocratic rule based on inflation (which he also has ideas on how we can measure better) that politicians can’t override. Maybe that would work, I will leave it to the experts.

 

money, debt, investment, and growth

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It’s interesting how economists talk about money, debt, investment, and growth. If you’re not an economist, you have to tie your brain lobes in a few knots to make sense of it. This is Michael Spence from NYU:

high unemployment, high and rising debt levels, and a global shortage of aggregate demand are constraining growth and generating deflationary pressures. And now, as then, the level and quality of investment have been consistently inadequate, with public spending on tangible and intangible capital – a critical factor in long-term growth – well below optimal levels for some time.

Of course, there are also new challenges. The dynamics of income distribution have shifted adversely in recent decades, impeding consensus on economic policy. And aging populations – a result of rising longevity and declining fertility – are putting pressure on public finances.

Nonetheless, the ingredients of an effective strategy to spur economic growth and employment are similar: available balance sheets (sovereign and private) should be used to generate additional demand and boost public investment, even if it results in greater leverage. Recent IMF research suggests that, given excess capacity, governments would probably benefit from substantial short-run multipliers. More important, the focus on investment would improve prospects for long-term sustainable growth, which would enable governments and households to pursue responsible deleveraging.

Here’s what I think it means. “Global shortage of adequate demand” means people aren’t spending enough money to support productive activity in the economy. Either they don’t have the money or they are saving it instead of spending it. Of course, we need a productive economy to generate the jobs and wages that get people money to spend. So it’s a chicken and egg problem that can spiral downwards once it gets started (“deflationary pressures”). Governments also aren’t investing in productive activity, either because they are afraid of debt or aren’t taking in enough taxes, or both. “Available balance sheets” means they should just wish new money into existence (governments can do that!) and spend it on investments like infrastructure, education, and research that tend to support long-term growth, which would get people more money, which they could spend to support more productive activity, and so on in a virtuous cycle. Money isn’t really real, as long as we think it is real. Debt doesn’t matter, as long as we believe it does matter. Belief in money and fear of debt usually stops us short of the absolute physical limits placed on us by our physical environment.